Empire Energy Group: 2Q20 Activities Move the Dial To "Drill-Ready"

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83 Views10 Aug 2020 08:00

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SUMMARY

Empire Energy Group

2Q20 activities move the dial to "drill-ready"

Empire Energy Group Limited (ASX:EEG) is a junior oil and gas producer and explorer with onshore NT and US oil & gas assets. EEG holds the largest acreage position (>14.5m acres) in the highly prospective, potentially global-scale NT McArthur-Beetaloo basins. The province is fast developing as a gas-rich (and potentially liquids-rich) key bolster for east coast Australia’s future energy needs and Darwin’s expanding LNG export terminals, amid strong policy support from both the Northern Territory (NT) and Federal governments. The Beetaloo Sub-basin alone is considered to contain recoverable unconventional shale dry gas volumes of over 100 Tcf, with liquids upside. EEG also owns conventional gas/oil assets in the US Appalachia, 80%-hedged with floor prices at US$2.50/mcf for 2020. Recent 2D
seismic results enabled a 22% upgrade of EEG’s NT P50 prospective resources to 13.5 Tcf gas (vs 11 Tcf previously). Crystallising EEG’s longer-term potential rests on successful drilling and production testing. EEG aims to begin a ~45-day vertical drill program to ~2900m, late Q3 2020, with its COVID-19 safe-work plan cleared by local authorities. Results are expected by November. We believe this upcoming A$7- 8m drill program can be comfortably funded from current cash.

Business model

Empire Energy Group (EEG) is a junior oil & gas producer/exploration company, focused on maturing its portfolio of onshore, long-life oil and gas fields. The company is the 2nd largest conventional gas producer in the US NY State and has held substantial exploration acreage (14.5m acres) in Australia’s Northern Territory McArthur-Beetaloo basin since 2010. Given the region’s high prospectivity, success from future drilling works may generate cashflows within 36-48 months, assuming links and upgrades to existing pipeline infrastructure are delivered in parallel. COVID-19 disruptions delay, rather than dent, the opportunity.

2Q20 quarterly takeaways – vertically funded; drill-ready

EEG’s 2Q20 activities & ~A$9.9m gross cash holdings came in line with expectations. Management progressed its NT resource estimate (P50 13.5 Tcf) & became “drill-ready” for its upcoming EP187 Carpentaria-1 vertical well appraisal program, designed to confirm the presence, hydrocarbon content & extent of the Beetaloo’s Velkerri/Kyalla Shales, while successfully navigating COVID-19 challenges to health & safety protocols. EEG’s US Appalachia business continues to run lean, is 80%-hedged at US$2.50/mcf; has debt covenant waivers until and including year-end and gained a US$0.55m forgivable Paycheck Protection Program loan in 2Q. Key upcoming events include: a) EP187 drilling commencement; b) 26 September option expiration (36.2m @ A$0.30); c) November drill results d) Carpentaria-1 vertical hydraulic fracturing approvals; & d) landowner access approvals on other tenements. Robust results from EEG’s 20/21 drill programs could evolve its P50 13.46 Tcf resource estimate into a 2C contingent resource, positioning EEG to attract strong funding partners. Positive read-throughs from Beetaloo neighbour activities (eg Origin/ Santos) are also likely to inject value.

Valuation

We assign a base case valuation of $153m or $0.58/share using the RaaS 3Q FY20 commodity price deck. Our valuation includes a 10% risk weighting to development risk expectations until the outcome of 22 August Northern Territory elections is known. EEG has several event drivers over the next 6-12 months which we view hold potential to generate a sizeable uplift in NAV.

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