Empire Energy Group Limited: Bubbles Pop Ahead of Drilling Key Lateral Section

Business model
Empire Energy Group, as a junior oil and gas producer/exploration company, is focused on maturing its portfolio of onshore, long-life oil and gas fields. The company holds substantial exploration acreage (28.9mn acres) in the world-class McArthur-Beetaloo basins in the Northern Territory and is actively progressing evaluation activity to support reserve bookings and underpin early gas development opportunities. Success could see first cash flow within 24-36 months (RaaS estimate), assisted by LPG liquid “credits”. Look- through results from horizontal drilling at adjacent tenements will help define the development model. EEG’s early downstream infrastructure and sales deals aim to speed- up its access to energy markets, which appear increasingly supply-constrained.

Going sideways can be a good thing: lateral section begins
EEG has started drilling the horizonal section of Carpentaria-2H on its EP187 tenement in the Beetaloo Sub-basin. Drilling is targeting the middle Velkerri B shale, the strongest gas flow contributor of the four prospective Velkerri Formation target zones during the recent Carpentaria-1 tests. Encouragingly, results from the just-concluded C-2 vertical well reported thick liquids-rich gas shows across the four zones with live gas bleeds from sidewall cores. These results are consistent with the C-1 well, 11km away, and suggest the potential for strong production rates. Regional activities are progressing. Origin/Falcon have reported optimistic Velkerri-76 results, with an 80:20 gas-liquids ratio and relatively rich total organic carbon levels of 4.3% from the Velkerri B shale zone. Santos/Tamboran have completed two horizontal wells to the north-west of EEG’s EP187 property, with flow test results expected by year-end. EEG represents a leveraged exposure to the Beetaloo, with a large acreage footprint; capital cost benefit (cheaper wells), strong gas-liquids upside potential and a first-mover advantage in place to leverage downstream commercial considerations. The next half-year could deliver a number of potentially significant re- rating events with fresh seismic data and completion of the C-2H program and flow testing. Netherland Sewell will be engaged to update the resource estimate incorporating the new data sets. The success case could underpin a material increase in 2C contingent resources to assist with field development planning. The company is well financed, with some $30mn in cash as at October-end.

Our mid-point valuation is $1.04/share ($622mn)
Our valuation range for EEG is $400-$738mn ($0.64-$1.19/share), with $622mn or $1.04/share at the mid-point. Further look-through results from regional works are to come by end-2021, while EEG’s next phase of drilling and seismics have the potential to materially increase 2P+2C volumes and better define recovery economics to crystallise our asset valuation range.