EMPIRE PETROLEUM CORP (EP) FY 2024 MD&A

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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