Empire Energy Group Limited: A Successful Quarter Builds Momentum for Future Delivery
Empire Energy Group Limited
A successful Quarter builds momentum for future delivery
Empire Energy Group Limited (ASX:EEG) is a junior oil and gas producer and explorer with onshore Northern Territory (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 region is fast developing as a gas- rich (and potentially liquids-rich) strategic bolster for east coast Australia’s future energy needs and Darwin’s expanding LNG export terminals, amid strong policy support from both Territory 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 2020 floor prices at US$2.50/mcf. 2D seismic results enabled a 22% upgrade of EEG’s NT P50 prospective resources to 13.5 Tcf gas in 1H20, with recent liquids-rich vertical drilling success on EP187 likely to see further resource upgrades in 1Q2021. Crystallising EEG’s longer-term potential rests on further drilling and flow test successes, with immediate focus on 2021 fracture stimulation work programs, supported by recently-bolstered cash reserves. Formation evaluation data updates from the recent EP187 Carpentaria-1 vertical well drilling program are expected later this month. Gross cash is A$17.7m.
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 may generate cashflows within 36-48 months, assisted by liquids “credits”, assuming links and upgrades to existing pipeline infrastructure are delivered in parallel, with Federal “Basin Strategic Plan” support.
Beetaloo results align to national energy development plans
EEG’s 3Q20 results came in-line with expectations. Operating losses were stemmed to US$1.03m (YTD US$2.04m), with US-bank debt drawn to US$6.7m. Highlights included: a) cash reserves bolstered to ~A$21m via a successful placement & options exercise, both at A$0.30; and b) above-expected liquids-rich gas log indications encountered across ~1,000m during EEG’s A$11.5m Carpentaria-1 vertical exploration drilling in Sept/Oct. This first well success offers scope for upgrades to EEG’s Beetaloo resource base, potentially to a maiden 2C contingent resource. The presence of liquids also expands EEG’s early commercialisation options, while shallower depths and greater saturations & porosities suggest cheaper drilling expenses and stronger vertical flow rates than first anticipated. Improvements in global gas prices; strengthening Federal & Territory policy support for gas developments; as well as positive gas flow results from Beetaloo neighbours further support EEG’s improving investment thesis. Looking ahead, we await a) core analysis details in December; b) approval for Carpentaria-1 vertical hydraulic fracturing in 2Q21 & Velkerri Shale horizontal fracturing in 4Q21; c) resource upgrades in 1Q21 & d) landowner access approvals to EEG’s 5 other McArthur-Beetaloo tenements. Robust results from planned 2021 drill programs could further evolve EEG’s NT P50 13.46 Tcf resource, positioning EEG to attract strong commercial partners.
Valuation
We incorporated the quarterly commodities update into our model and this has lifted our mid-point valuation to $0.61/share (previously $0.56/share). Our valuation range is from $0.44-$1.26/share. 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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