EMPIRE PETROLEUM CORP (EP)

ITEM
7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The
following discussion and analysis presents management’s perspective of our business, financial condition and overall performance.
This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook
for the future and should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements,
which are included in this Annual Report on Form 10-K in Item 8, Financial Statements and Supplementary Data, and the information set
forth in Part I, Item 1A – Risk Factors.

Overview

Our
primary business is the optimization and development of oil and gas interests. We have incurred losses from operations in 2024 and 2023.
There is no assurance that we will be profitable or obtain funds necessary to finance our future operations.

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.

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.

Inflation

The
effect of inflation on the Company has generally been to increase its cost of operations, general and administrative costs and direct
costs associated with oil and natural gas production.

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.

Liquidity
and Going Concern

The Company has a revolving line of credit agreement with Equity Bank which
requires the Company to maintain compliance with certain financial covenants computed on a quarterly and annual basis. As of December
31, 2024, the Company was in compliance with all required covenants and projected to be in compliance with all debt covenants over the
next 12 months. However, the Company was in default of its covenants in the third quarter of 2024 but obtained a waiver on November 12,
2024, to alleviate all prior defaults. The Company carried a negative working capital of approximately $8.9 million as of December 31,
2024, an overall decline of approximately $2.6 million from the previous year. Cash on hand also declined approximately $5.5 million during
the same period. The overall decline in working capital and cash is primarily driven by the Starbuck Drilling Program in North Dakota
which incurred substantial capital spend. Additionally, the Company initiated a return-to-production program in Texas which incurred additional
unforeseen operational costs. The additional production from these projects did not fully offset the costs incurred and contributed to
the overall negative financial trend. To meet its obligations, the Company increased its revolver commitment to $20.0 million in November
2024 and had two rights offerings in April and November of 2024 which raised approximately $30.5 million of capital, net of transaction
costs, to help fund the capital spend projects. Additionally, as a result of increasing its revolver commitment, the Company had approximately
$8.7 million remaining unused commitment as of December 31, 2024, which can be used for future obligations. However, the revolver commitment
is reduced monthly by $0.25 million commencing on December 31, 2024 (See Note 7), limiting future access to capital. While these debt
and equity transactions provided additional funding towards these projects and other obligations, the Company still carried approximately
$8.9 million of negative working capital at period end and future expected operating cash flows do not sufficiently meet the Company’s
obligations for the next 12 months. Given the negative working capital and insufficient expected operating cash flow there is substantial
doubt about the Company’s ability to continue as a going concern.

Empire
has committed financial support from Phil Mulacek who owns approximately 21.2% of our common stock outstanding as of December 31,
2024, and Energy Evolution, our largest stockholder who owns approximately 31.9% of our common stock outstanding as of December 31,
2024. Both are related parties of the Company (see Note 14). Mr. Mulacek and Energy Evolution are willing and able to provide these
additional funds, if required, for Empire to continue to meet its obligations over the next 12 months. These additional funds
may be raised through related party warrants, or a related party note payable that may or may not have conversion rights into shares
of common stock of Empire.

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Management has considered these plans in evaluating
FASB ASC 205-40, Presentation of Financial Statements - Going Concern. Management believes the above actions are sufficient to
allow Empire to meet its obligations as they become due within one year after the date the financial statements are issued. Management
believes that its plans, and support from the existing related-party stockholders discussed above, is probable and has alleviated the
substantial doubt regarding Empire’s ability to continue as a going concern.

Recent
Developments

Empire
has completed 13 wells in North Dakota related to our Starbuck Drilling Program during the year ended December 31, 2024.

On
February 16, 2024, Empire issued a Promissory Note to Energy Evolution, a related party. Energy Evolution advanced Empire $5.0 million.
On May 24, 2024, Energy Evolution elected to convert the Note to shares of common stock of Empire and received 800,000 shares under the
terms of the Promissory Note. See Note 7 for further details.

In
April 2024, the Company completed a subscription rights offering (the "April Rights Offering”) which raised gross proceeds
of approximately $20.7 million. Each subscription right entitled the holder to purchase 0.161 shares of common stock at a subscription
price of $5.00 per share per one whole share of common stock. The subscription rights were non-transferable and not listed for trading
on any stock exchange or market.

On
April 9, 2024, Empire partially exercised a purchase option originally issued on August 9, 2023, (the "Purchase Option”) to
acquire additional working interests in certain of Empire’s New Mexico properties from Energy Evolution. The additional assets
acquired represent approximately 60% of the total assets collectively acquired by Empire and Energy Evolution in the third quarter of
2023 (the "Option Assets”). As consideration, upon closing of the partial exercise of the Purchase Option, Empire issued Energy
Evolution 600,000 shares of common stock of Empire based on an agreed upon price of $5.00 per share for an aggregate agreed upon value
of $3.0 million which was 60% of the purchase price of $5.0 million under the Purchase Option.

On
August 8, 2024, Empire successfully extended the Purchase Option with the issuance of 16,800 shares of common stock to Energy Evolution
to obtain the right to acquire the remaining Option Assets for an exercise price of $2.0 million subject to certain adjustments and payable
in cash, unless the parties agree that some or all may be paid by issuance of common stock to Energy Evolution. The Purchase Option expires
on August 9, 2026.

In
November 2024, Empire completed a subscription rights offering (the "November Rights Offering”) which raised gross proceeds
of $10.0 million. Each subscription right entitled the holder to purchase 0.063 shares of common stock at a subscription price of $5.05
per share per one whole share of common stock. The subscription rights were non-transferable and not listed for trading on any stock
exchange or market.

On
November 18, 2024, the Company entered into the First Amendment to the Credit Facility (the “First Amendment”) to increase
the initial maximum revolver commitment to $20.0 million through December 29, 2026. See Note 7 for further details.

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Production
and Operating Data

The
following table sets forth a summary of our production and operating data:

(1) Excludes the effect of net cash receipts from (payments on) derivatives.

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Results
of Operations

The
following table reflects our summary of operating information. Because of normal production declines, increased or decreased drilling
activity and the effects of acquisitions, the historical information presented below should not be interpreted as indicative of future
results.

Revenues

Revenues
for 2024 increased compared to prior year primarily due to higher oil volumes in North Dakota due to our Starbuck Drilling Program
partially offset by a slight overall decline in commodity prices.

Realized
oil prices for 2024 were approximately $71.44 per barrel, while realized prices for the prior year were approximately $75.19 per barrel,
a decrease in price of approximately 5%. Oil volumes were higher by approximately 93,000 barrels or 19% primarily due to new wells completed
in North Dakota during the third quarter of 2024 as well as the acquisition of additional working interest in New Mexico.

Realized
natural gas prices for 2024 were approximately $0.37 per Mcf, while realized prices for the prior year were approximately $2.02 per Mcf,
a decrease in price of approximately 82%. This is primarily due to the depressed natural gas prices in the third quarter of 2024 in New
Mexico.

Realized
NGLs prices for 2024 were approximately $14.21 per barrel, while realized prices for the prior year were approximately $12.21 per barrel,
an increase in price of approximately 16%.

Lease
Operating Expense and Production Taxes

Lease
operating expense was lower in 2024 primarily due to lower workover activities partially offset by higher expenses related to an increase
in production. Lease operating expense includes approximately $5.9 million of total workover expense for 2024 as compared to approximately
$12.0 million for 2023. The higher workover expense in 2023 was primarily in New Mexico as Empire continued to work over wells in the
region to enhance and maintain production.

Production
taxes were higher for 2024 compared to 2023 as a result of the higher product revenues discussed above.

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Depreciation,
Depletion, Amortization, Accretion and Impairment

The
higher DD&A in 2024 as compared to 2023 is due in part to the increase in production, the acquisition of additional working interest
in New Mexico as well as the impact of the capitalized costs associated with the new drilling activity as part of our Starbuck Drilling
Program in North Dakota. Accretion also increased slightly from prior period due to the new drilling activity.

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. There was no impairment recorded during the years ended December 31, 2024 and 2023.

General
and Administrative Expense (excluding stock-based compensation)

General
and Administrative Expense (excluding stock-based compensation) increased primarily due to an increase in salaries and benefits associated
with an increase in employee headcount.

Stock-based
Compensation

We
utilize stock-based compensation to compensate members of management and retain talented personnel. Our stock-based compensation decreased
in 2024 due to a lower number of awards in 2024. We anticipate stock-based compensation to continue to be utilized in 2025 and beyond
to attract and retain talented personnel and compensate our board members and consultants.

Interest
Expense

Cash-based
interest expense increased slightly due to a higher outstanding balance under our Credit Facility partially offset by lower interest
rates. We have minimal interest-bearing vehicle and equipment notes payable.

Non-cash
interest expense is primarily attributable to the conversion to equity of the related party note payable as described in Note 7 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. However, because of the current uncertainty as to our ability to achieve sustained
profitability and the potential limitation of NOL carryforwards, a full valuation allowance has been established that offsets the amount
of any tax benefit available for each period presented in the consolidated statements of operations.

We
had a loss before income taxes for 2024 and 2023, respectively, which the tax benefit was offset by a change in the valuation allowance.
For 2024 and 2023, our effective tax rates were 0% and 1%, respectively.

Liquidity

As
noted below, our working capital is negative as of December 31, 2024, which is primarily the result of a lower cash balance due to capital
spending as part of our Starbuck Drilling Program and return-to-production efforts in Texas. As of December 31, 2024, we had approximately
$2.3 million in cash on hand and approximately $8.7 million available under our Credit Facility. Empire will require additional funds
to satisfy the payables discussed above which are greater than estimated cash flows from operations over the next 12 months. Phil Mulacek
and Energy Evolution, both related parties of Empire and our largest two stockholders, owning 21.2% and 31.9%, respectively, of the common
shares outstanding as of December 31, 2024, have indicated that they will, and have the ability to, provide sufficient support to sustain
the operating, investing, and financing activities of Empire, as necessary. In addition to the April Rights Offering and November Rights
Offering, management continues to seek additional sources of capital via the debt or equity markets to improve liquidity going forward.
See Liquidity and Going Concern in Note 1 of Notes to Consolidated Financial Statements for further discussion of management’s
plans.

Empire
expects to continue to incur costs related to drilling activities in core areas as well as future oil and natural gas acquisitions in
core areas. During 2024, Empire has incurred approximately $42.2 million of additions to oil and natural gas properties, primarily related
to the drilling program in the Starbuck field of North Dakota. It is expected that Empire will use a combination of debt or equity issuances,
cash on hand, and cash flows from operations to fund capital programs, ongoing operations, and any potential acquisitions.

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Working
Capital

Working
capital is presented in the table below. The decrease of approximately $2.6 million was primarily driven by a lower cash balance due
to increased capital spending related to the Starbuck Drilling Program in North Dakota.

Cash
Flows

The
following table summarizes our statements of cash flows:

Cash
Flows from Operating Activities

The
impact of higher oil production and lower workover expenses in 2024 compared to 2023 contributed to the increase in cash flows from operating
activities.

Cash
Flows from Investing Activities

Cash
flows from investing activities in 2024 include approximately $42.2 million of additions to oil and gas properties compared to approximately
$25.0 million in 2023 primarily due to the development of our operations as part of our Starbuck Drilling Program in North Dakota.

In
2023, we received approximately $2.8 million due to the release of a negotiated sinking fund requirement and acquired additional interest
in our New Mexico oil and gas properties for approximately $2.0 million.

Cash
Flows from Financing Activities

Cash
flow from financing activities in 2024 include proceeds from the April Rights Offering and the November Rights Offering of approximately
$30.5 million, net of transaction costs (see Note 9). In addition, cash flows from financing activities in 2024 include $5.0 million
from a promissory note issued by the Company to a related party and approximately $6.7 million borrowed on the Credit Facility (see Note
7).

In
2024, we received approximately $0.6 million from stock issuances and warrant exercises. In 2023, we received approximately $12.5 million
from stock issuances and warrant exercises.

Capital
Resources

General

Empire’s
primary sources of short-term liquidity are cash and cash equivalents, net cash provided by operating activities, and issuance of debt
or equity securities. Empire’s short- and long-term liquidity requirements consist primarily of capital expenditures, acquisitions
of oil and natural gas properties, payments of contractual obligations, and working capital obligations. Funding for these requirements
may be provided by any combination of Empire’s sources of liquidity. Although Empire expects that its sources of funding will be
adequate to fund its liquidity requirements, no assurance can be given that such funding sources will be adequate to meet Empire’s
future needs.

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Capital
Expenditures

For
2024, Empire incurred approximately $42.2 million of additions to oil and natural gas properties which primarily reflects continued drilling
and completions activity related to our Starbuck Drilling Program in North Dakota. For 2023, additions to oil and natural gas properties
totaled $27.0 million including $2.1 million related to acquisitions. The approximate $25.0 million not related to acquisitions primarily
reflects development of our North Dakota operations.

Related
Party Transactions

At
times the Company may enter into transactions with related parties. These transactions primarily occur with our two largest shareholders,
Phil Mulacek and Energy Evolution, and are approved by the board of directors. See Note 14 for further discussion on related party activity
during the year.

Off-Balance
Sheet Arrangements

We
do not have any off-balance sheet arrangements.

Critical
Accounting Estimates

The
preparation of financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”)
requires management to use judgment to make estimates and assumptions that affect certain amounts reported in the consolidated financial
statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts
reported in the future. Because estimates and assumptions require significant judgment, future actual results could differ from those
estimates and could have a significant impact on our results of operations, financial position and cash flows. We re-evaluate our estimates
and assumptions at least on a quarterly basis and periodically update the estimates used in the preparation of the financial statements
based on management’s latest assessment of the current and projected business and general economic environment. There have been
no significant changes to Empire’s critical accounting estimates during the year ended December 31, 2024. In our management’s
opinion, the more significant reporting areas impacted by management’s judgments and estimates are as follows:

Successful
Efforts Method of Accounting for Oil and Natural Gas Activities

We
use the successful efforts method of accounting for oil and natural gas operations. Under this method, costs to acquire oil and natural
gas properties, drill successful exploratory wells, drill and equip development wells, and install production facilities are capitalized.
Estimated proved oil and natural gas reserves, management’s outlook on commodity prices and projected future cash flows of oil
and natural gas reserves are a significant part of our financial calculations. The following are examples of how these estimates affect
financial results:

Proved
oil and natural gas reserves are the estimated quantities of oil, natural gas and NGLs which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions.
Reserve quantities and future cash flows included in this report are prepared in accordance with guidelines established by the SEC and
the FASB. The accuracy of reserve estimates is a function of:

Proved
reserves information included in this report is based on estimates prepared by independent petroleum engineers, CG&A. The independent petroleum engineers evaluated 100% of our estimated proved producing reserve quantities and their
related future net cash flows as of December 31, 2024. Estimates prepared by others may be higher or lower than these estimates.
Because these estimates depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may
be different from the quantities of oil and natural gas that are ultimately recovered. Management may make revisions to reserve
estimates throughout the year as additional information becomes available. 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 expense by approximately $0.9 million. The actual impact would depend on the
specific areas impacted.

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Impairment
of Oil and Gas Properties

We
assess our proved properties for impairment using estimates of future undiscounted cash flows. This assessment requires significant judgment
and assumptions including commodity price outlooks, estimates of reserve quantities, expected lease operating costs and capital costs.
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, 2024 and 2023, and did not identify any impairments, respectively.

Asset
Retirement Obligation

Asset
retirement obligations (“ARO”) 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. The discounted fair value of an ARO liability is required to be recognized in the period in which it is
incurred, with the associated asset retirement cost capitalized as part of the carrying cost of the oil and natural gas asset. The recognition
of an ARO requires that management make numerous assumptions regarding such factors as the estimated probabilities, amounts and timing
of settlements; the credit-adjusted risk-free rate to be used; inflation rates; and future advances in technology. 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. We account for forfeitures of equity-based
incentive awards as they occur. Stock-based compensation expense related to time-based restricted stock units is based on the price of
our common stock on the grant date. Stock-based compensation related to options is the fair value of the option recognized over the vesting
period. The fair value of an option is determined using the Black-Scholes option valuation with the following assumption inputs: dividend
yield, expected annual volatility, risk free interest rate and an expected life.

Income
Taxes and Uncertain Tax Positions

Our
tax provision is based upon the tax laws and rates in effect in the applicable jurisdiction in which operations are conducted and income
is earned. As part of the process of preparing the consolidated financial statements, management is required to estimate the income tax
provision. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from
differing treatment of items, such as depreciation, amortization and certain accrued liabilities for tax and accounting purposes.

Deferred
tax expense or benefit represents the change in the balance of deferred tax assets or liabilities. 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, 2024 and 2023, a full valuation allowance for deferred tax assets was recorded.

Management
applies the accounting standards related to uncertainty in income taxes. This accounting guidance clarifies the accounting for uncertainties
in income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the
consolidated financial statements. It requires that we recognize in the consolidated financial statements the financial effects of a
tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation
processes, based upon the technical merits of the position. It also provides guidance on measurement, classification, interest, penalties
and disclosure. We had no uncertain tax positions at December 31, 2024, or December 31, 2023.

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ITEM 7.  MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read together with
the consolidated financial statements and notes to consolidated financial statements, which are included in this Annual Report on Form
10-K in Item 8, Financial Statements and Supplementary Data, and the information set forth in Part I, Item 1A – Risk Factors.

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.

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.

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.

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.

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Results of Operations

The following table reflects our summary operating information. Because
of normal production declines, increased or decreased drilling activity and the effects of acquisitions, the historical information presented
below should not be interpreted as indicative of future results.

NM: A percentage calculation is
not meaningful due to change in signs, a zero-value denominator or a percentage change greater than 200.

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.

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.

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%. 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. 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.

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 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.

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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). 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.
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.

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.

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. 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. However, because of the current uncertainty as to our ability to achieve sustained profitability and the potential limitation of
NOL carryforwards, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented
in the consolidated statements of operations.

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. 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. 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. 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. 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). 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. 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.
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.

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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. This
change was primarily driven by payables related to the Starbuck Drilling Program.

Cash Flows

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. Cash flow from operating
activities in 2022 benefited from higher commodity prices and higher natural gas and NGL volumes.

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. 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. In 2022, we began recompletions and other capitalizable efforts in multiple states as we sought to bring
production online from existing wells and bring on new production from sidetrack drilling in North Dakota which led to an increase in
additions to oil and natural gas properties in 2022. 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 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.

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).

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. 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.

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. 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. 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.

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. Because estimates
and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact
on our results of operations, financial position and cash flows. We re-evaluate our estimates and assumptions at least on a quarterly
basis. In our management’s opinion, the more significant reporting areas impacted by management’s judgments and estimates
are as follows:

Successful Efforts Method of Accounting for Oil
and Natural Gas Activities

We use the successful efforts method of accounting
for oil and natural gas operations. Under this method, costs to acquire oil and natural gas properties, drill successful exploratory wells,
drill and equip development wells, and install production facilities are capitalized. Estimated proved oil and natural gas reserves, management’s
outlook on commodity prices and projected future cash flows of oil and natural gas reserves are a significant part of our financial calculations.
Following are examples of how these estimates affect financial results:

Proved oil and natural gas reserves are the
estimated quantities of oil, natural gas and NGLs which geological and engineering data demonstrate with reasonable certainty to be recoverable
in future periods from known reservoirs under existing economic and operating conditions. Reserve quantities and future cash flows included
in this report are prepared in accordance with guidelines established by the SEC and the Financial Accounting Standards Board (“FASB”).
The accuracy of reserve estimates is a function of:

Proved reserves information included in this
report is based on estimates prepared by independent petroleum engineers, Cawley Gillespie &Associates. 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. Because these estimates depend on many assumptions, all
of which may differ substantially from actual results, reserve estimates may be different from the quantities of oil and natural gas that
are ultimately recovered. Management may make revisions to reserve estimates throughout the year as additional information becomes available.
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.

Impairment of Oil and Gas Properties

We assess our proved properties for impairment
using estimates of future undiscounted cash flows. This assessment requires significant judgment and assumptions including commodity
price outlooks, estimates of reserve quantities, expected lease operating costs and capital costs. 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, 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. The discounted fair
value of an ARO liability is required to be recognized in the period in which it is incurred, with the associated asset retirement cost
capitalized as part of the carrying cost of the oil and natural gas asset. The recognition of an ARO requires that management make numerous
assumptions regarding such factors as the estimated probabilities, amounts and timing of settlements; the credit-adjusted risk-free rate
to be used; inflation rates; and future advances in technology. 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. We account for forfeitures of equity-based incentive awards as they occur. Stock-based compensation
expense related to time-based restricted stock units is based on the price of our common stock on the grant date. Stock-based compensation
related to options is the fair value of the option recognized over the vesting period. The fair value of an option is determined using
the Black-Scholes option valuation with the following assumption inputs:  dividend yield, expected annual volatility, risk free interest
rate and an expected life.

Income Taxes and Uncertain Tax Positions

Our tax provision is based upon the tax laws and rates
in effect in the applicable jurisdiction in which operations are conducted and income is earned. As part of the process of preparing the
consolidated financial statements, management is required to estimate the income tax provision. This process involves estimating the actual
current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation,
amortization and certain accrued liabilities for tax and accounting purposes.

Deferred tax expense or benefit represents the change
in the balance of deferred tax assets or liabilities. 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. This accounting guidance clarifies the accounting for uncertainties in income taxes by prescribing a minimum
recognition threshold that a tax position is required to meet before being recognized in the consolidated financial statements. It requires
that we recognize in the consolidated financial statements the financial effects of a tax position, if that position is more likely than
not of being sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits
of the position. It also provides guidance on measurement, classification, interest, penalties and disclosure. We have no uncertain tax
positions at either December 31, 2023 or December 31, 2022.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The
following discussion should be read together with the consolidated financial statements and notes to consolidated financial statements,
which are included in this Annual Report on Form 10-K in Item 8, Financial Statements and Supplementary Data, and the information set
forth in Part I, Item 1A – Risk Factors.

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.

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.

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 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. 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. Because of normal production declines, increased or decreased drilling activity
and the effects of acquisitions, the historical information presented below should not be interpreted as indicative of future results.

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. 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%. 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.

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. 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. 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.

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.

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.

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. 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. 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. 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. 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.

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.

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. 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 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. 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. However, because of the current uncertainty as to our ability to achieve sustained profitability and the
potential limitation of NOL carryforwards, a valuation reserve has been established that offsets the amount of any tax benefit
available for each period presented in the consolidated statements of operations.

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.
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.

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. 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.

Cash
Flows

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. 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.

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 2022, we began recompletions and other
capitalizable efforts in multiple states as we sought to bring production online from existing wells and bring on new production from
sidetrack drilling in North Dakota which led to an increase in additions to oil and natural gas properties in 2022. 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. 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. 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. 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. 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. 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.

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.

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. Because estimates and assumptions require significant judgment, future actual results could differ
from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We re-evaluate
our estimates and assumptions at least on a quarterly basis. In our management’s opinion, the more significant reporting areas
impacted by management’s judgments and estimates are as follows:

Successful
Efforts Method of Accounting for Oil and Natural Gas Activities

We
use the successful efforts method of accounting for oil and natural gas operations. Under this method, costs to acquire oil and natural
gas properties, drill successful exploratory wells, drill and equip development wells, and install production facilities are capitalized.
Estimated proved oil and natural gas reserves, management’s outlook on commodity prices and projected future cash flows of oil
and natural gas reserves are a significant part of our financial calculations. Following are examples of how these estimates affect financial
results:

Proved
oil and natural gas reserves are the estimated quantities of oil, natural gas and NGLs which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions.
Reserve quantities and future cash flows included in this report are prepared in accordance with guidelines established by the SEC and
the Financial Accounting Standards Board (“FASB”). The accuracy of reserve estimates is a function of:

-27-

Proved
reserves information included in this report is based on estimates prepared by independent petroleum engineers, Cawley Gillespie &Associates.
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. Because these estimates
depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different from the quantities
of oil and natural gas that are ultimately recovered. Management may make revisions to reserve estimates throughout the year as additional
information becomes available. 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.

Impairment
of Oil and Gas Properties

We
assess our proved properties for impairment using estimates of future undiscounted cash flows. This assessment requires significant judgment
and assumptions including commodity price outlooks, estimates of reserve quantities, expected lease operating costs and capital costs.
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.

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. The discounted fair value of an ARO liability is required to be recognized in the period in which it is
incurred, with the associated asset retirement cost capitalized as part of the carrying cost of the oil and natural gas asset. The recognition
of an ARO requires that management make numerous assumptions regarding such factors as the estimated probabilities, amounts and timing
of settlements; the credit-adjusted risk-free rate to be used; inflation rates; and future advances in technology. 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. We
account for forfeitures of equity-based incentive awards as they occur. Stock-based compensation expense related to time-based restricted
stock units is based on the price of our common stock on the grant date. Stock-based compensation related to options is the fair value
of the option recognized over the vesting period. The fair value of an option is determined using the Black-Scholes option valuation
with the following assumption inputs:  dividend yield, expected annual volatility risk free interest rate and an expected life.

Income
Taxes and Uncertain Tax Positions

Our
tax provision is based upon the tax laws and rates in effect in the applicable jurisdiction in which operations are conducted and income
is earned. As part of the process of preparing the consolidated financial statements, management is required to estimate the income tax
provision. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from
differing treatment of items, such as depreciation, amortization and certain accrued liabilities for tax and accounting purposes.

Deferred
tax expense or benefit represents the change in the balance of deferred tax assets or liabilities. 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. This accounting guidance clarifies the accounting for uncertainties
in income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the
consolidated financial statements. It requires that we recognize in the consolidated financial statements the financial effects of a
tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation
processes, based upon the technical merits of the position. It also provides guidance on measurement, classification, interest, penalties
and disclosure. We have no uncertain tax positions at either December 31, 2022 or December 31, 2021.

-28-

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read together
with the consolidated financial statements and notes to consolidated financial statements, which are included in this Annual Report on
Form 10-K in Item 8, Financial Statements and Supplementary Data and the information set forth in Part I, Item 1A – Risk Factors.

Overview

The Company's primary business is the exploration
and development of oil and gas interests. The Company has incurred significant losses from operations, and there is no assurance that
it will achieve profitability or obtain funds necessary to finance its future operations.

The Company seeks to increase shareholder value
by growing reserves, production, revenues, and cash flow from operating activities by executing its mission to use highly-skilled personnel
to thoughtfully and expertly spend capital to realize reserves on producing properties.

Management places emphasis on operating cash flow
in managing its business, as operating cash flow considers the cash expenses incurred during the period and excludes non-cash expenditures
not related directly to the Company’s operations.

Business Strategy

The Company’s business strategy is to obtain
long-term growth in reserves and cash flow on a cost-effective basis utilizing experienced personnel throughout the Company. 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)
(the “Seller’) to acquire, among other things, certain oil and natural gas properties in New Mexico. The purchase price was
$17,800,000 subject to customary adjustments. The transaction closed on May 14, 2021 with an effective date of January 1, 2021. For more
information about the transaction, refer to the financial statements and footnotes incorporated by reference herein.

-21-

Results of Operations

The following table reflects our summary operating
information. Because of normal production declines, increased or decreased drilling activity and the effects of acquisitions, the historical
information presented below should not be interpreted as indicative of future results.

Revenues

Revenues increased as a result of more volumes produced
from legacy assets due to successful execution of the Company’s mission to cost-effectively produce more volumes paired with the
XTO acquisition’s revenues and volumes brought online from efforts to make the field produce more volumes combined with favorable
pricing environments in the Company’s core operating areas. Approximately $11.2 million in oil revenues, $1.7 million in gas revenue,
and $3.1 million in NGL revenue was attributed to production acquired with the XTO acquisition.

Lease Operating Expense and Taxes

Lease operating expense rose with the XTO acquisition
and in response to the Company’s execution of its mission to increase production in its legacy assets. The Company has worked to
cost-effectively increase production throughout its asset base utilizing experienced personnel and third-party service providers. Production
and ad valorem taxes have increased as a direct result of the XTO acquisition’s properties and increased volumes produced and sold.
The acquisition of New Mexico assets accounted for approximately $5.0 million of the increase in lease operating expenses and $1.3 million
of the increase in production and ad valorem taxes.

Depreciation, Depletion, Amortization and Accretion
and Impairment

There were no indicators of impairment on the Company’s
properties at year-end, primarily due to favorable futures pricing at December 31, 2021. Due to favorable pricing realized throughout
2021 and the addition of PDP reserves in New Mexico, DD&A expense decline year-over-year from approximately 13% in 2020 to 6% in
2021.

General and Administrative Expense

The Company’s implemented a new Board of
Directors compensation plan in 2021 resulting in board compensation paid of approximately $475,000 in 2021, exclusive of stock-based
compensation received. Fees paid for legal and outsourced services increased by approximately $425,000 as a direct result of
acquisition-related work, SEC filings related to the Company’s operations, and the Company’s successful uplisting from
the OTCQB to be freely traded on the NYSE American. Outsourced accounting fees increased by approximately $375,000 as additional
work was required to integrate the New Mexico assets into the existing accounting system as well as additional resources required to
perform routine accounting services on the new assets. Also included in general and administrative expenses is $989,000 in non-cash
right to buy costs related to the unsecured notes payable discussed in the Related Party Transactions note below.

-22-

The Company utilizes stock-based compensation to
compensate members of management and retain talented personnel. The Company anticipates stock-based compensation to continue to be utilized
in 2022 and beyond to attract and retain talented personnel.

Interest Expense

Cash-based interest expense declined with a
corresponding decrease in the Company’s Credit Facility. The Company has minimal interest-bearing vehicle and equipment notes payable.

Non-cash interest expense is fully attributable
to the related party notes payable as described in Related Party Transactions below.

Liquidity

As of December 31, 2021, the Company had approximately
$3.6 million cash on hand and approximately $300,000 available on its Credit Facility.  The Company expects to incur costs related
to future oil and natural gas acquisitions for the foreseeable future.  It is expected that management will use a combination of
cash flows from operations as well as seeking additional debt and equity funding for these acquisitions and to fund ongoing operations.

Working Capital

Working capital (presented below) was $1.1 million
as of December 31, 2021 compared to a deficit of $3.9 million as of December 31, 2020, representing a change of approximately $5 million.
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, 2021, as well as the stronger pricing environment in 2021.

Cash Flows

Cash Flows from Operating Activities

The Company 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. Ongoing operations from core assets contributed to cash flows provided by operating activities
for the year ended December 31, 2021.

Cash Flows from Investing Activities

Cash flows from investing activities primarily increased
due to the XTO acquisition that occurred in May 2021 and established the Company in the state of New Mexico, the Company’s largest
single acquisition to date that resulted in cash outflows of approximately $17.9 million. The Company also participated in the drilling
of four non-operated wells through its Empire North Dakota subsidiary that had a cash outflow of approximately $2.5 million for the year
ended December 31, 2021. As part of the XTO acquisition, the Company entered into an agreement to create a sinking fund for future plugging
liabilities, paying approximately $4.8 million into that fund for the year.

Cash
Flows from Financing Activities

The XTO acquisition and operations executing the
Company’s 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. The Company has quarterly payment obligations related to its bank debt of $300,000 per quarter
in addition to minimal monthly payments for notes payable arising from the purchase of vehicles and equipment.

-23-

Related Party Transactions

The issuance of the Secured Note and an Unsecured Note to Energy
Evolution as described below are related party transactions for accounting purposes, but are not required to be disclosed under Item 13
of this Form 10-K.

Senior Secured Convertible Note

On May 14, 2021, Empire New Mexico entered
into a Senior Secured Convertible Note Agreement (the “Secured Note”) in the amount of $16,250,000 with Energy Evolution
Master Fund, Ltd., a related party (“Energy Evolution”). The Secured Note was collateralized by all assets of Empire New
Mexico prior to its conversion to common stock in December 2021. Due to the terms of the Secured Note, the transaction had the following
non-cash elements for the year ended December 31, 2021:

On September 29, 2021 the parties entered into
a Loan Modification Agreement pursuant to which Energy Evolution exchanged $6,500,000 in principal under the Secured Note in exchange
for 1,326,302 shares of common stock, warrants to purchase 500,000 shares of the Company’s common stock at $5 per share and
amended certain terms of the remaining $5,700,000 of principal under the Secured Note.

On December 30, 2021, the Secured Note was
amended to allow full conversion of the remaining balance and Energy Evolution converted 100% of the remaining principal ($5.7 million)
and accrued interest ($55,000) outstanding at that date into 1,154,085 shares of the Company’s common stock.

Unsecured Convertible Notes

In May 2021 the Empire New Mexico entered into
$3,243,000 of Unsecured Convertible Notes (the “Unsecured Notes”) with a group of accredited investors, including the Company’s
related party Energy Evolution, constituting $1,500,000 of the total Unsecured Convertible Notes. The Unsecured Notes had a maturity
of May 9, 2022 with a single payment and interest at 5%. The Unsecured Note holders had the ability to convert their notes to common
stock of the Company at the lesser of $5 per share or the price per share offered by the Company if the Company has a future capital
raise for an aggregate 648,600 shares of common stock (without giving effect to any interest that may be converted). At December 31,
2021 $2,918,000 of the Unsecured Notes had been converted into 583,600 shares of common stock of the Company and 5,594 shares of common
stock have been issued as payment for accrued interest on the Unsecured Note. The remaining Unsecured Notes in the amount of $325,000
were repaid in September 2021. Amortization of these notes was recorded as a non-cash interest expense
of approximately $545,000.

The Company determined the embedded conversion
features of the Unsecured Notes were equity-classified financing instruments. The fair value of the conversion feature was determined
using a beneficial conversion model based on a 60-day weighted average stock price and the maximum number of shares to be received if
converted. As issuance, the amount recorded to additional paid in capital was $544,824. The discount associated with these transactions
is amortized under the interest method and resulted in interest expense of $544,824 for the year ended December 31, 2021.

As an inducement for investors to enter
into the Unsecured Convertible Notes, the Company’s Chief Executive Officer and President collectively offered to each investor
the right to purchase a number of shares of common stock equal to 40% of such investor’s principal balance under its Unsecured
Convertible Note at $3 per share (the “right to buy”). Energy Evolution exercised its right to buy 150,000 shares of the
Company’s common stock. In conjunction with the conversion of the Unsecured Notes, each of the Company’s Chief Executive
Officer and President partially exercised a warrant and options to purchase 160,900 shares at an exercise price of $1.00 and $1.32 respectively.
The Company determined that offering the “right to buy” shares resulted in a non-cash expense of $989,155 of the Company
based on the fair value of contributions made by the Company’s Chief Executive Officer and President on its behalf. The fair value
of the “right to buy” shares was determined using a Black-Scholes model. The expense is included in General and Administrative
in the Consolidated Statement of Operations.

Effective Tax Rate

For all periods presented, the Company's effective
tax rate is 0%. The Company has generated net operating losses since inception, which would normally reflect a tax benefit in the statement
of operations and a deferred asset on the balance sheet. However, because of the current uncertainty as to the Company's ability to achieve
profitability, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented
in the statements of operations.

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OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet
arrangements.

CRITICAL ACCOUNTING POLICIES AND 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 and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Because estimates and assumptions require significant
judgment, future actual results could differ from those estimates and could have a significant impact on the Company's results of operations,
financial position and cash flows. The Company re-evaluates its estimates and assumptions at least on a quarterly basis. The following
policies may involve a higher degree of estimation and assumption:

Oil and Natural Gas Properties

The Company uses the successful efforts method of
accounting for oil and natural gas operations. Under this method, costs to acquire oil and natural gas properties, drill successful exploratory
wells, drill and equip development wells, and install production facilities are capitalized. Exploration costs, including unsuccessful
exploratory wells, geological and geophysical are charged to operations as incurred. Depreciation, depletion and amortization of the
leasehold and development costs that are capitalized for proved oil and natural gas properties are computed using the units-of-production
method, at the field level, based on total proved reserves and proved developed reserves, respectively, as estimated by independent petroleum
engineers. Oil and natural gas properties are periodically assessed for impairment whenever changes in facts and circumstances indicate
a possible significant deterioration in the future cashflows expected to be generated by an asset group, but at least annually. Individual
assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent
of the cash flows of other groups of assets, generally on a state-by-state basis. All of our properties are located within the continental
United States.

All costs related to unsuccessful exploratory wells
are expensed when such wells are determined to be non-productive and other exploration costs, including geological and geophysical costs,
are expensed as incurred. The application of the successful efforts method of accounting requires management's judgment to determine
the proper designation of wells as either developmental or exploratory, which will ultimately determine the proper accounting treatment
of the costs incurred. The results from a drilling operation can take considerable time to analyze, and the determination that commercial
reserves have been discovered requires both judgment and application of industry experience. Wells may be completed that are assumed
to be productive and actually deliver oil and gas in quantities insufficient to be economic, which may result in the abandonment of the
wells at a later date. The evaluation of oil and gas leasehold acquisition costs requires management's judgment to estimate the fair
value of exploratory costs related to drilling activity in a given area.

Impairment of Oil and Gas Properties

Management’s assessment of the results of
commodity price outlooks, planned future sales or expiration of all or a portion of such leaseholds impact the amount and timing of impairment
provisions. 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.

Oil and Natural Gas Reserve Quantities

Reserve quantities and the related estimates of future
net cash flows affect periodic calculations of depletion, impairment of oil and natural gas properties, and asset retirement obligations.
Proved oil and natural gas reserves are the estimated quantities of oil, natural gas and NGLs which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions.
Reserve quantities and future cash flows included in this report are prepared in accordance with guidelines established by the SEC and
the Financial Accounting Standards Board (“FASB”). The accuracy of reserve estimates is a function of:

Proved reserves information included in
this report is based on estimates prepared by independent petroleum engineers, Cawley Gillespie &Associates. The independent
petroleum engineers evaluated 100% of the Company’s estimated proved producing reserve quantities and their related future net
cash flows as of December 31, 2021. Estimates prepared by others may be higher or lower than these estimates. Because these
estimates depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different
from the quantities of oil and natural gas that are ultimately recovered. Management may make revisions to reserve estimates
throughout the year as additional information becomes available. Management makes changes to depletion rates, impairment
calculations, and asset retirement obligations in the same period that changes to reserve estimates are made.

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Depreciation, Depletion and Amortization

The rate used to calculate and record DD&A is
dependent upon estimates of total proved developed reserves, which incorporate various assumptions and future projections. If the estimates
of total proved or proved developed reserves decline, DD&A expense increases. Such a decline in reserves may result from lower commodity
prices, which may make it uneconomic to operate wells due to higher cost fields. Management is unable to predict changes in reserve quantity
estimates as such quantities are dependent on the success of executing the Company’s mission as well as future economic conditions.

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. The discounted
fair value of an ARO liability is required to be recognized in the period in which it is incurred, with the associated asset retirement
cost capitalized as part of the carrying cost of the oil and natural gas asset. The recognition of an ARO requires that management make
numerous assumptions regarding such factors as the estimated probabilities, amounts and timing of settlements; the credit-adjusted risk-free
rate to be used; inflation rates; and future advances in technology. 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. Increases in the ARO liability due to passage of time impact net income as
accretion expense. The related capitalized cost, including revisions thereto, is charged to expense through DD&A over the life of
the field.

Stock-Based Compensation

The Company recognized stock-based compensation expense
associated with restricted stock units, which consists of time-based awards. The Company accounts for forfeitures of equity-based incentive
awards as they occur. Stock-based compensation expense related to time-based restricted stock units is based on the price of the Company’s
common stock, $0.001 par value per share on the grant date. The Company classifies grants to be settled in shares as equity awards.

Income Taxes and Uncertain Tax Positions

The Company’s tax provision is based upon the
tax laws and rates in effect in the applicable jurisdiction in which operations are conducted and income is earned. As part of the process
of preparing the consolidated financial statements, management is required to estimate the income tax provision. This process involves
estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items,
such as depreciation, amortization and certain accrued liabilities for tax and accounting purposes. The effective tax rate for financial
statement purposes is 0% for all periods presented.

Deferred tax expense or benefit represents the change
in the balance of deferred tax assets or liabilities. 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, 2021 and 2020, a valuation
allowance for deferred tax assets was recorded.

Management applies the accounting standards related
to uncertainty in income taxes. This accounting guidance clarifies the accounting for uncertainties in income taxes by prescribing a
minimum recognition threshold that a tax position is required to meet before being recognized in the consolidated financial statements.
It requires that we recognize in the consolidated financial statements the financial effects of a tax position, if that position is more
likely than not of being sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical
merits of the position. It also provides guidance on measurement, classification, interest, penalties and disclosure. The Company has
no uncertain tax positions at either December 31, 2021 or December 31, 2020.

Revenue Recognition

The Company predominantly derives its revenue from
the sale of produced oil, natural gas and NGLs. Revenues are recognized when the recognition criteria of FASB ASC Topic 606, Revenue
from Contracts with Customers, are met, which generally occurs at the point in which title passes to the customers. We receive payment
from one to three months after delivery. At the end of each quarter, we estimate the amount of production delivered to purchasers and
the price we will receive. Variances between our estimated revenue and actual payment are recorded in the month the payment is received.
Historically, differences have been insignificant.

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