THE backing of Chris Ellison’s Mineral Resources has been described by Hartleys’ Simon Andrew as “broadly positive”, but the analyst is keen to see Empire Oil & Gas fix its issues at the Red Gully North-1 well to affirm its speculative buy recommendation.
Andrew said MinRes was “better aligned to the interests” of Empire than any of its other funders since the departure of former joint venture partner ERM Power from the upstream space.
Not only is MinRes now Empire’s largest shareholder with a 19.36% stake, but it has extended a $15.1 million working capital facility with a more manageable repayment profile than previous proposals.
The implied price of the acquisition was 45cps, Andrew said.
According to an announcement by MinRes, the motivation behind the investment in Empire is to gain direct access to a natural gas production for use in small scale LNG plants at remote mine sites. The first of these is expected to be installed at the Mount Marion Lithium project.
It could also become a buyer of additional gas production from the Red Gully gas operation.
“In the near term, successful remediation of the Red Gully North-1 well completion followed by a successful flow test will be the major driver of the stock price,” Andrew said.
Remediation of the well is expected to begin next year after an independent assessment of the initial drilling and completion revealed poor cementing around the 7-inch casing, which caused higher than expected water production.
A circulation cement squeeze has been recommended to fix the problem at an estimated cost of $1.5-2 million, money that will be well spent, Andrew said.
“Given the economic benefit of a successful remediation, we think this is a positive use of funds,” he said.
“As previously reported, RGN contains an estimated best contingent resource of 7.5 petajoules within the Cattamarra C and Upper D intervals.
“Additional gas volumes could be used to increase production, via a short 4km tie back to the Red Gully gas plant, or extend the life of the current plant.”
Hartleys values the Red Gully plant at $45 million or 40cps, and the remaining of its valuation is made up from Red Gully North (17cps), Gingin East and other exploration potential (18cps).
Net debt is $9 million or 8cps.
Hartleys is maintaining its speculative buy recommendation on Empire with a 12-month target price of 67cps because it likes Empire’s mix of production and its large acreage positon in a known petroleum basin.
Risks associated with Andrew’s recommendation include the potential for the failure to rectify issues at Red Gully North-1 and a possible decline in gas and condensate pricing.
Separately, Empire has been granted a waiver for Listing Rule 10.1 that allows its to grant a first ranking security, comprised of mortgages over EP 389 (Red Gully North-1), PL18 and PL19 (including the Red Gully Processing Facility) and an unsecured guarantee by Empire.
That was a key part of its funding agreement with MinRes.
Empire was trading at $0.42 this morning.
EGO Price at posting:
45.0¢ Sentiment: Hold Disclosure: Held
