Empire Petroleum Corporation

Hello, and thank you for listening to today's conversation with the leadership team at Empire Petroleum concerning the current state of their business and future plans. My name is Wes Harris, and I'm a partner at Alpitri Advisors. Our firm works with the Empire team on investor relations and related matters. Empire recently released their fourth quarter and full year 2022 operational and financial results. A copy of the press release is available on the company's website at www.EmpirePetroleumCorp.com on the news and press releases page in the investor relations section. With me today are Mike Morissette, President and Chief Executive Officer, and Phil Mullisac, Chairman of the Board. Before we begin our conversation with Mike and Phil, I'd like to make the following remarks concerning forward-looking statements. Please note that various remarks that may be made on this recording about future expectations, plans, and prospects for the company constitute forward-looking statements for the purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's filings with the SEC. The company assumes no obligation to update the information contained in this recording. Today's discussion may also include references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings release that is posted on the website. So with that, I'll begin the conversation with a question for Mike. Mike, over the last few years, Empire has expanded its footprint of operations through strategic acquisitions. What are your plans for growing the company moving forward, especially as it relates to the next 12 to 24 months?

Thanks, Wes. We intend on growing our five core basins organically. We've done pilot programs in some of them, and we feel very good about the assets, the running room that we have to develop them. And so we... We just look for organic growth.

Great. Another one for you, Mike. Recently had a transition in management. Can you provide some background on the rationale behind the change?

Yeah, we think Empire is going to be a thriving company that will be around for a long time, and that is the way we are managing it. Whether it's the way we allocate capital, how we constructively develop the assets for the long haul, or how we think about labor resources necessary to extract all the value out of it. Tommy Pritchard, our previous CEO, was instrumental in getting us to where we are now, did a very good job from an acquisition perspective, and now it's time to transition to operational excellence and being a great public company.

Great. Thanks for that. Question for you, what types of rates of return are you targeting as you consider ongoing capital investment in the business versus return of shareholder capital through dividends and or share buybacks?

That could be tricky, but it's sort of not. I mean, we basically came from a micro cap to a small cap company. And that is all, as Mike said, organic growth. Sort of led... that in my prior public company. I'm a patrolman engineer by training and exponential growth is what I focused on. And that's what we're doing. So we looked at the five major bases that we have. And we've started kicking off pilot programs to understand the learning curve of what we have to do to achieve that excellence. And we're seeing very mature, I mean, over a single digit growth production on our pilot programs. And so for capital spending, it would be a three to nine month payout on the projects that we're doing. So they're multi wells, different technology, and blending that and the 23 to 24 budget.

Yeah, and I'll just add to it. We don't, at the moment, while we're at, you know, a strong growth company, we don't see doing dividends or share buybacks. We'll be plowing that money back into our assets and into the field.

And we'll be doing it with, I mean, we're unencumbered balance sheets. We'll be doing that growth with our capital and we're unencumbered. So future syndicates on credit facility and making sure that we're protecting that for a long-term healthy balance sheet. And that means at times we'll have hedges and at times we won't. Yeah.

Thank you. Okay, great. I'm going to get this to both of you, and we'll start with Mike. Mike, how should we think about the cadence of capital spending over the next two to three years, and what type of production growth should we expect?

So over the next two to three years, I think we're going to see CapEx between 2020 and $30 million for starters. We have some pretty lofty ideas on what we think that will do based on the pilot programs that we've recently initiated just up in the Rockies alone. You know, naturally, we're at 2,200 VOE per day now. I mean, it's very logical to think that our benchmarks are 5,000 VOE per day, 7,500, 15,000. And like Phil said, you know, most of our assets are unencumbered and look for us to be putting a banking syndicate together to facilitate some of that capex spend along with our cash on hand and our future cash flow. So we've been thinking through this and as I said, we look for a look for a banking syndicate in the future.

So you got anything to add to that?

No, it's really, we've got a great operational staff that we've put together. So it's getting it from an acquisition where we're buying assets in the $36 where it's straightforward to now we're peeling back those onion peels on a technical standpoint and bringing that exceptional capacity and executing that in the field. And so we look at it and how do we Do better with the money and do more for less money. And that means you can outperform.

Okay. Another one for you, Phil. With the capital spending program you envisioned for this year and for 2024, how much of your costs are locked in at this point and how much flexibility do you have with that?

Oh, that's – as an independent – I mean, we were a vertically integrated mini-major – So what we did is outperform versus industry standards. We were drilling the biggest capacity wells for one-tenth of some of the super majors. And so I'm bringing that same skill set. We're building that through the operational team now. So even though we have a budget, third-party estimates, as I just stated, what we try to do is how do we beat those estimates by 20% to 30% and that way we can roll that into the higher performing assets that we can get a three month or faster payout and that allows us to grow our production base and free cash flow and so we we're a lot more flexible and any downturn in pricing it won't hurt us we're not going to burden ourselves in any debt and As prices go up, we'll manage the hedge book on a positive.

Okay, okay. So, Mike, a question for you. Does the company have a preference for one commodity over another in future development plans, given the company was weighted around 60% oil for full year 2022?

I think for now, you know, our preference is oil, although we have a long-term or a three- to five-year trend. you know where we think gas will be a lot better in three to five years and what does that mean well maybe we'll start looking at gas weighted assets over the next year two years if some of them are you know bolt-ons that we could acquire or some interesting situations but We'd like to have more gas, but we think it's a three to five years out from a pricing standpoint. So we're not in any hurry. We're going to focus on oil for now.

Okay. Well, Phil, Mike just mentioned acquisitions. What's your appetite for additional acquisitions given the current market environment?

When it's the right timing, we jump in strong. So while we're in a middle ground, it takes the technical capacity to to unleash real value. We're not here to issue more shares and grow our market cap. What we're here to do is add a decimal point to the share price. And that's what small cap growth stocks are all about. So we have to look at the intrinsic value and make sure that we're not taking on too much that would impair our future looking at the volatility. I look at the volatility as an opportunity to pick off the right little plums, as you say, at the right price and optimize. It's like if we can get some strategic gas along with what we're doing or bank that for the future, that's really how we're going to look at it as a company.

When we do look at acquisitions, we'll be focusing on how it stresses the balance sheet. and make sure it fits in properly and it's accretive to our shareholders.

Okay. Well, this is sort of a final wrap-up question. It gives you guys the opportunity to talk about whatever you like, but I'll start with Mike. So what are you most excited about in the business right now?

Man, I'm just excited where we are. I mean, like Phil mentioned, we were a micro cap, and now we're a small cap, and we know everything. where we're headed next and the way we do that is we grow organically we have those assets to do that we we feel and last year was the first time in the fall that we went out and you know did some type of meaningful capex program and and we're pleased with the results and that's going to lead into much more for 20 for the next two years we we've been developing a great team you know we've looked at every area And we brought in, I know you guys probably saw, we brought in Larry Faulkner, that was the former CAO of WPX. Kevin Vann was the former CFO of WPX. We brought in substantial land people in both Tulsa, substantial land meaning great experience in both Tulsa and Houston. We're beeping up our operations in Houston. The board is very involved, which is something that... I think we'd really like people to understand Phil's petroleum engineer has a lot of experience in the energy space, has done some great things. We have other board members that have done some great things in business and energy. We just have the right team. I feel like we're teed up and ready to go.

I couldn't say it better. The people we have are the core to our execution. They're just now coming out from As I said, we did a pilot program and have seen phenomenal results, over a decimal point, almost a 20-fold increase as well. And that was in a testing phase that we didn't have ideal. Now we're going to go and take that to a more optimum level and then get all those economies scaled. And that's done through a great board that have operational capacity In petroleum and like Admiral Lewis, I mean, he just is an exceptional group, and we're all aligned to shareholders. We all are shareholders. So it's actually not a couple people in management getting paid, siphoning off money. We all make our core growth by owning the stock and making the right business decisions. And we have great people to work with, and that gets me excited. I mean, I'm at an age I don't have to work, but I'm working every day because we like it and we love achieving what people say couldn't be done and then doing it with exceptional capacity.

Well, that sounds like a great way to wrap this up. So I guess on behalf of Mike and Phil, I want to thank everyone for listening to our conversation today concerning Empire's business and future outlook. We appreciate the continued support of our shareholders. We look forward to keeping everyone apprised of our progress. Have a great day.