Empire Energy Group Limited: C-2H Drilled; V-Section Confirms 192m Liquids-Rich Gas

Business model
Empire Energy Group is focused on maturing its portfolio of onshore, long-life oil and gas fields. The company 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 also help define EEG’s development model. EEG’s early downstream infrastructure and sales deals aim to speed- up its access to energy markets, which appear increasingly supply-constrained.

Drilling underpins pervasive nature of Velkerri prospectives
The key takeaway from EEG’s initial Carpentaria-2 drilling is the consistency of the vertical section results with Carpentaria-1, ~11km south, with ~190m of liquids-rich gas intersected across the four middle Velkerri pay zones (Velkerri A, B, Intra A/B and C), although ~240m deeper, with the resulting higher pressures likely to drive stronger flow rates. EEG has commissioned NSAI to prepare an updated independent resources report, and anticipates a material increase in Contingent Resources, with results expected early in Q1 2022. Petrophysical data collected during the drilling of C-2H is being incorporated into fracture stimulation models ahead of the Q2 2022 fracture stimulation and flow test of C-2H. EEG represents a leveraged exposure to the Beetaloo, with a large acreage footprint; capital cost benefits (noting the comparable capex of C-2H and C-1), strong gas- liquids upside potential and a first-mover advantage leveraging downstream commercial considerations. The next half-year should deliver a number of potentially significant re- rating events, with fresh seismic data and completion of EEG’s C-2H flow testing programme to drive a potentially material increase in 2C Contingent Resources to assist with field development planning. Regional Beetaloo Sub-Basin well activities by Santos/Tamboran and Origin/Falcon, targeting the Middle Velkerri shales, are proving equally promising, with preliminary results comparing strongly with commercial shale plays in the US, with Santos/Tamboran due to release initial flow test results from their latest T2H and T3H drill program before year-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 seismic have the potential to materially increase 2P+2C volumes and better define recovery economics to crystallise our asset valuation range.