EP 10-Q Quarter ended June 30, 2011

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________

FORM 10-Q

_________________

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2011

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _____________ to _____________

_________________

EMPIRE PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

_________________

4444 E. 66TH STREET, LOWER ANNEX, TULSA, OKLAHOMA 74136-4207
(Address of Principal Executive Offices) (Zip Code)

918-488-8068
(Registrant’s telephone number, including area code)

N/A
(Former name or former address and former fiscal year, if changed since last report)

_________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  [x]     No  [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  [x]  No  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes [ ]      No  [x]

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by SectionS 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes [ ]      No  [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 12, 2011 was 83,564,235.

EMPIRE PETROLEUM CORPORATION

INDEX

PART I — FINANCIAL INFORMATION

PART II — OTHER INFORMATION

EMPIRE PETROLEUM CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2011

(UNAUDITED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:

The accompanying unaudited financial statements of Empire Petroleum

Corporation ("Empire" or the "Company") have been prepared in accordance

with United States generally accepted accounting principles for interim

financial information and the instructions to Form 10-Q. Accordingly,

they do not include all of the information and footnotes required by

United States generally accepted accounting principles for complete

financial statements. In the opinion of management, all adjustments

considered necessary for a fair presentation of the Company's financial

position, the results of operations, and the cash flows for the interim

period are included. All adjustments are of a normal, recurring nature.

Operating results for the interim period are not necessarily indicative of

the results that may be expected for the year ending December 31, 2011.

The information contained in this Form 10-Q should be read in

conjunction with the audited financial statements and related notes for

the year ended December 31, 2010 which are contained in the Company's

Annual Report on Form 10-K filed with the Securities and Exchange

Commission (the "SEC") on March 23, 2011.

The Company has incurred significant losses in recent years. The

continuation of the Company as a going concern is dependent upon the

ability of the Company to attain future profitable operations and/or

additional debt or equity financing until profitable operations are achieved.

These financial statements have been prepared on the basis of United States

generally accepted accounting principles applicable to a company with

continuing operations, which assume that the Company will continue in

operation for the foreseeable future and will be able to realize its assets

and discharge its obligations in the normal course of operations. Management

believes the going concern assumption to be appropriate for these financial

statements. If the going concern assumption were not appropriate for these

financial statements, then adjustments might be necessary to adjust the

carrying value of assets and liabilities and reported expenses.

The Company continues to explore and develop its oil and gas interests.

The ultimate recoverability of the Company's investment in its oil and gas

interests is dependent upon the existence and discovery of economically

recoverable oil and gas reserves, confirmation of the Company's interest in

the oil and gas interests, the ability of the Company to obtain necessary

financing to further develop the interests, and the ability of the Company

to attain future profitable production.

As of June 30, 2011, the Company had $15,421 of cash on hand. In order

to sustain the Company's operations on a long-term basis, the Company

continues to look for merger opportunities and consider public or private

financings.

Compensation of Officers and Employees

The Company's only executive officer serves without pay or other compensation.

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The fair value of these services is estimated by management and is recognized

as a capital contribution. For the three months ended June 30, 2011, the

Company recorded $25,000 as a capital contribution by its executive officer.

Fair Value Measurements

The Financial Accounting Standards Board ("FASB") fair value measurement

standards define fair value, establish a consistent framework for

measuring fair value and establish a fair value hierarchy based on the

observability of inputs used to measure fair value. The Company's primary

marketable asset is cash, and it owns no marketable securities.

2. PROPERTY AND EQUIPMENT:

GABBS VALLEY PROSPECT

The Company's leasehold acreage at June 30, 2011 consisted of 48,541 acres.

The Company’s ownership in the leasehold acreage is now 50%.

As of December 31, 2005, there had been no wells drilled on the Gabbs

Valley Prospect. However, in November 2005, the Company received the

results of a 19-mile 2-D swath seismograph survey conducted on the

prospect and, based on the results of the survey, the Company and its

partners determined that a test well should be drilled on the prospect.

The Company also elected to increase its interest in the prospect by

taking a farm-in from Cortez Exploration LLC (formerly O. F. Duffield).

Empire agreed to pay Cortez $675,000 in lease costs plus 45% of the costs

associated with the drilling of a test well to earn an additional 30%

working interest which made its total working interest 40%. The lease block

of 44,604 acres was increased to 75,521 acres by the acquisition of an

additional 30,917 acres from the Department of the Interior (Bureau of

Land Management) in June 2006. The block was reduced to 75,201 acres due

to the expiration of one 320-acre lease during 2007. In 2008 and 2009, the

Company acquired leases on 17,624 additional acres through federal lease

sales, bringing its total to 92,825 acres, however due to lease expirations

in 2010 the total is now 48,541 acres.

After reaching 5,195 feet in connection with drilling the first test well,

the Company and its partners elected to suspend operations on the well, and

released the drilling rig and associated equipment. Company personnel

and consultants then evaluated the drilling and logging data and after the

study was completed, Empire and its partners decided to conduct a thorough

testing program on the well. The Company re-entered the well on April 17,

2007 and conducted a series of drill stem tests and recovered only drilling

mud. It was then determined after considerable study that the formation is

likely very sensitive to mud and water used in drilling which may have caused

clays in the formation to swell preventing any oil that might be present to

flow into the well bore. During 2007, the Company increased its interest in

the prospect leases to 57% when one of the joint participants elected to

surrender its 30% share of the prospect.

In 2008, the Company and its partners engaged W. L. Gore and Associates to

carryout an Amplified Geochemical Imaging Survey which covered approximately

sixteen square miles. The survey was concentrated along the apex of the large

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Cobble Cuesta structure which included the areas around the Empire Cobble

Cuesta 1-12 exploratory test and the other test well drilled in the immediate

area. Both of these tests encountered oil shows and the geochemical survey

indicated potential hydrocarbons beyond the two well bores. A new

Federal drilling unit was formed and approved by the Bureau of Land

Management. This unit was known as the Paradise Drilling Unit and contained

40,073 acres out of our total lease block then containing 92,825 acres.

In July 2010, the Company entered into a farm-in agreement with its joint

lease holders holding a 41% working interest in the 40,073 acre Paradise

Unit. On July 19, 2010, the Company commenced drilling a test well in the

Paradise Unit on the Gabbs Valley Prospect in Nevada. The Company drilled

the Paradise Unit 2-12 test well to a depth of 4,250 feet before

drilling problems caused the Company to cease drilling. The Company tested

the well between 3,700 feet and 3,782 feet where oil shows had been found.

The Company recovered small amounts of oil containing paraffin, which may have

been restricting the oil flow. However, swab tests failed to increase the oil

flow and the Company has suspended operations on the well and assigned the

lease and the 1-12 and 2-12 wells to the other leasehold owners from which the

Company had taken a farmout. The new owners plan to do further testing on the

2-12 well and assumed liabilities associated with the lease and both the

1-12 and 2-12 wells. Further testing by the new owners is expected in the

third quarter of 2011 pending financing. The Company has utilized the

results of the testing and other factors to determine its next action with

respect to the Gabbs Valley leasehold. The Company is now looking for an

industry partner to take a farmout on approximately 25,000 acres with the

obligation to drill either a Triassic test well or to a depth of 7,000

feet, whichever first occurs.

Sale of Working Interest

In October 2010, the Company sold 7% of its working interest in the Gabbs

Valley Prospect leases for $700,000. In connection with such sale, the

purchasers were granted a working interest in the Paradise Unit 2-12 well,

unit leases and an option to participate in the farmin of the non-unit

leases, which option has expired.

SOUTH OKIE PROSPECT

On August 4, 2009, the Company purchased, for $25,000 and payment of lease

rentals of $4,680, a nine month option to purchase 2,630 net acres of oil and

gas leases known as the South Okie Prospect in Natrona County, Wyoming.

The option allowed the Company to purchase the leasehold interests for

$35,000. The Tensleep Sand at depths from 3,300 feet to 4,500 feet is the

primary target. The Tensleep is an excellent oil reservoir with the potential

of 700 barrels of oil per acre foot recovery. As of December 31, 2009, the

Company acquired 11 miles of seismic data and studies of this data were

completed in early January 2010. An additional geological study was also

completed early in January 2010. Based on these studies, the Company exercised

its option in 2010. Further engineering studies have estimated the reserve

potential of this prospect at between 1,000,000 to 4,000,000 barrels of oil.

Subject to securing additional financing and/or engaging an industry partner,

the Company plans to drill or cause to be drilled a test well in 2011.

3. NOTE PAYABLE - RELATED PARTY

On February 1, 2011 the Albert E. Whitehead Living Trust, under the terms of

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a convertible note, advanced $100,000 to the Company. The note has a term of

one (1) year and accrues interest at the rate of four (4) percent per annum.

The principal and interest owed under the note may be converted by the holder

into common stock at the strike price of $0.10 per share.

4. EQUITY

On March 17, 2010, John C. Kinard, a member of the Company's Board of

Directors, was issued options to purchase 70,000 shares of the Company's

common stock under the 2006 Stock Incentive Plan at a strike price of $0.25

per share. The options immediately vested and expire after ten years. The

Company recorded an expense of $16,380 for the options. Fair values

were estimated at the date of grant of the options, using the Black-Scholes

Option Valuation Model with the following weighted average assumptions:

risk free interest rate of 3.65%, volatility factor of the expected market

price of the Company's common stock of 162%, no dividend yield, and a weighted

average expected life of the options of 5 years. For the purpose of

determining the expected life of the options, the Company utilizes the

Simplified Method as defined in Staff Accounting Bulletin No. 107 issued by

the SEC.

On September 9, 2010, Alfred H. Pekarek, a consulting geologist to the Company

was issued options to purchase 50,000 shares of the Company's common stock

under the 2006 Stock Incentive Plan at a strike price of $0.26 per share. The

options immediately vested and expire after ten (10) years. The Company

recorded an expense of $11,700 for the options. Fair values were estimated at

the date of grant of the options, using the Black-Scholes Option Valuation

Model with the following weighted average assumptions: risk free interest

rate of 2.77%, volatility factor of the expected market price of the Company's

common stock of 142%, no dividend yield, and a weighted average expected life

of the options of 5 years. For the purpose of determining the expected life

of the options, the Company utilizes the Simplified Method as defined in Staff

Accounting Bulletin No. 107 issued by the SEC.

On Februry 28, 2011, Kevin R. Seth, the newest member of the Company's Board

of Directors, was issued options to purchase 150,000 shares of the Company's

common stock under the 2006 Stock Incentive Plan at a strike price of $0.10

per share. The options immediately vested and expire after ten years. The

Company recorded an expense of $11,295 for the options. Fair values

were estimated at the date of grant of the options, using the Black-Scholes

Option Valuation Model with the following weighted average assumptions:

risk free interest rate of 3.42%, volatility factor of the expected market

price of the Company's common stock of 172%, no dividend yield, and a weighted

average expected life of the options of 5 years. For the purpose of

determining the expected life of the options, the Company utilizes the

Simplified Method as defined in Staff Accounting Bulletin No. 107 issued by

the SEC.

Diluted EPS (Earnings per Share) gives effect to all dilutive potential common

shares outstanding during the period. The computation of Diluted EPS does not

assume conversion, exercise or contingent exercise of securities that would

have an anti-dilutive effect on losses. As a result, if there is a loss from

continuing operations, Diluted EPS is computed in the same manner as Basic

EPS. At June 30, 2011, the Company had 1,245,000 options and 2,222,226

warrants outstanding, that were not included in the calculation of earnings

per share for the period then ended. Such financial instruments may become

dilutive and would then need to be included in future calculations of Diluted

EPS. At June 30, 2011, the outstanding options and warrants were considered

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anti-dilutive since the respective strike prices were above the market price

and since the Company has incurred losses year to date.

In January 2010, the Company received stock subscriptions of $285,000 as a

part of its then ongoing private placement offering, which concluded on

January 26, 2010. The subscribers received 4,071,428 shares of stock valued

at $.07 per share. Subsequent to the private placement, the Company

determined that it needed to enter into the farm-in agreement and raise

additional funds in order to drill the 2-12 well on the Gabbs Valley

Prospect.

In July 2010, the Company completed its most recent private placement offering

by issuing 4,444,446 shares of common stock, with an aggregate purchase price of

$400,000 and 2,222,226 warrants to purchase shares of common stock at a price of

$.50, which were set to expire in June and July, 2011, however they have been

extended to December 31, 2011. Proceeds from the private placement were

utilized for the Company's share of costs to drill the 2-12 well on the Gabbs

Valley Prospect (See Note 2).

Proceeds of the June-July 2010 private placement were allocated $101,250 to

common stock warrants and $298,750 to common stock and paid in capital. The

value of the warrants was estimated using the Black-Scholes Valuation Model

with the following weighted average assumptions: risk free interest rate of

.30%, no dividend yield, volatility factor of the expected market price of the

Company's common stock of 157%, and a weighted average expected life of the

warrants of one year.

As of June 30, 2011, the Company had outstanding warrants that would have

expired in June and July 2011. On May 3, 2011 the Company extended the term

of the outstanding warrants which allow the holders to purchase 2,222,226 shares

of common stock at a strike price of $0.50, until December 31, 2011. Fair

values of the extended warrants were estimated at the date of extension using

the Black-Scholes Option Valuation Model with the following weighted average

assumptions: risk free interest rate of .09%, volatility factor of the expected

market price of the Company's common stock of 200%, no dividend yield, and a

weighted average expected life of the warrants of 6 months. The outstanding

warrants were valued at $17,778, which had no income statement effect.

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

GENERAL TO ALL PERIODS

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 the

funds necessary to finance its operations. 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.

THREE MONTH PERIOD ENDED JUNE 30, 2011, COMPARED TO THREE MONTH PERIOD

ENDED JUNE 30, 2010.

Production and operating expenses decreased $71,896 to $0 for the three

months ended June 30, 2011, from $71,896 for the same period in 2010.

The decrease was due to the expiration of leases on the Gabbs Valley

Prospect which had been paid in the previous year.

General and administrative expenses decreased by $14,592 to $56,777 for the

three months ended June 30, 2011, from $71,369 for the same period in

2010. The decrease was primarily due to the decrease in insurance costs in

2011.

There was no depreciation expense attributable to the three months ended

June 30, 2011 or June 30, 2010 because the depreciable assets were fully

depreciated.

For the reasons discussed above, net loss decreased $84,224 from

$(141,999) for the three months ended June 30, 2010, to $(57,775)

for the three months ended June 30, 2011.

SIX MONTH PERIOD ENDED JUNE 30, 2011, COMPARED TO SIX MONTH PERIOD

ENDED JUNE 30, 2010.

Production and operating expenses decreased $93,105 to $(11,279) for the six

months ended June 30, 2011, from $81,826 for the same period in 2010.

The decrease was primarily due to the expiration of leases on the Gabbs Valley

Prospect which had been paid in the previous year and refunds of certain

drilling costs which were expensed in 2010.

General and administrative expenses decreased by $920 to $137,510 for the

six months ended June 30, 2011, from $138,430 for the same period in

2010. The decrease was primarily due to decreased insurance costs in 2011.

There was no depreciation expense attributable to the six months ended

June 30, 2011 or June 30, 2010 because the depreciable assets were

fully depreciated.

For the reasons discussed above, net loss decreased $89,878 from

$(217,349) for the six months ended June 30, 2010, to $(127,471)

for the six months ended June 30, 2011.

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RECENTLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board (FASB) periodically issues new

accounting standards in a continuing effort to improve standards of financial

accounting and reporting. The Company has reviewed the recently issued

pronouncements and no new accounting standards have been adopted since the

Company's Annual Report on Form 10-K for the fiscal year ended December 31,

2010 was filed.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

As of June 30, 2011, the Company had $15,421 of cash on hand. The

Company believes that its cash on hand will allow it to finance its operations

for the next two months. In order to sustain the Company's operations on a

long-term basis, the Company intends to continue to look for merger

opportunities and consider public or private financings. The Company plans to

undertake further exploration of the Gabbs Valley and South Okie Prospects in

2011. The Company will likely look to industry partners to drill the next

wells on these prospects.

OUTLOOK

As stated elsewhere in this Form 10-Q, on May 1, 2007, after further

testing of the Company's 1-12 well in the Gabbs Valley Prospect, the

Company decided to partially plug and abandon the well since no hydrocarbons

were recovered. However, the Company was encouraged by the data it acquired

in connection with the drilling, logging and testing of the well. Such data,

additional studies of such data, the assistance of geological and

engineering consultants and an Advanced Geochemical Imaging Survey conducted

in December 2008 led the Company to determine that further drilling was

warranted. It is possible that excessive mud exposure in the hole for over

five months seriously impeded the process of recovering hydrocarbons. It was

determined that a new test well should be drilled using a different

method of drilling.

The Company drilled the Paradise Unit 2-12 well to a depth of 4,250 feet before

drilling problems caused the Company to cease drilling. The Company recovered

small amounts of oil containing paraffin, which may have been restricting the

oil flow. However, swab tests failed to increase the oil flow and the Company

suspended operations on the well and assigned the lease and the 1-12 and

2-12 wells to the other leasehold owners from which the Company had taken a

farmout. The new owners plan to do further testing on the 2-12 well and

assumed the liabilities associated with the lease and both the 1-12 and 2-12

wells. Further testing by the new owners is expected in the third quarter

pending financing. The Company will reassess its plans for the

Gabbs Valley leasehold, however, additional studies indicate potential drill

sites exist on the remaining acreage and the Company plans to attempt to

associate with industry partner(s) to drill another test well this year on

this prospect.

Subject to securing additional financing and/or engaging an industry partner,

the Company plans to drill or cause to be drilled a test well on its South

Okie Prospect in 2011.

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MATERIAL RISKS

The Company has incurred significant losses from operations and there is no

assurance that it will achieve profitability or obtain the funds necessary to

finance continued operations. For other material risks, see the Company's

Form 10-K for the period ended December 31, 2010, which was filed on March

23, 2011.

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q, including this section, includes certain

statements that may be deemed "forward-looking statements" within the meaning

of federal securities laws. All statements, other than statements of

historical facts, that address activities, events or developments that the

Company expects, believes or anticipates will or may occur in the future,

including future sources of financing and other possible business

developments, are forward-looking statements. Such statements are subject

to a number of assumptions, risks and uncertainties and could be affected by

a number of different factors, including the Company's failure to secure short

and long-term financing necessary to sustain and grow its operations, increased

competition, changes in the markets in which the Company participates and the

technology utilized by the Company and new legislation regarding environmental

matters. These risks and other risks that could affect the Company's business

are more fully described in reports it files with the SEC, including its Form

10-K for the fiscal year ended December 31, 2010. Actual results may vary

materially from the forward-looking statements.

The Company undertakes no duty to update any of the forward-looking statements

in this Form 10-Q.

Item 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an

evaluation under the supervision of the Company's Chief Executive Officer (and

principal financial officer) of the effectiveness of the design and operation

of the Company's disclosure controls and procedures pursuant to Securities

Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, the

Company's Chief Executive Officer (and principal financial officer) has

concluded that the disclosure controls and procedures as of the end of the

period covered by this report are effective. During the period covered by this

report, there was no change in the Company's internal controls over financial

reporting that has materially affected or that is reasonably likely to

materially affect the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 6. Exhibits

EMPIRE PETROLEUM CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the

registrant has duly caused this report to be signed on its behalf by the

undersigned thereunto duly authorized.

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