Farminee needs a wife.

G'day Egoites.

(apologies for the corny thread header: but given that we need a farmin partner, I thought it was appropriate!)

Nothing formally from the company in almost two months, with the three key questions being the current production decline (and whether the well intervention at GGW1 will go ahead), extended production testing at RNG1 (and perhaps further D zone testing which was previously discounted), and farm-out discussions (which were last reported to be at an "advanced stage").

For those that missed it - Hartleys did sneak in a valuation on 19th May 2017 where they further discussed these matters, but also maintained their speculative buy rating based on their view of EGO as "the most prospective of the smaller junior players" (ex-AWE or ORG).  Their corporate valuation, taking into account net debt, and applying heavy discounts to the valuation of oil and gas at Red Gully North, comes in at 27.1 cps, roughly double the current share price.  That valuation is, of course, contingent on the company moving forward - for as Hartleys note "exploration success in the near term is required to maintain this level of overhead [referring to current corporate costs circa $3m per annum] and the drive a re-rating in the share price".

Ultimately, then, the current share price (call it 12 cents) only represents a "bargain" (for prospective re-rating) if Empire can find a farmin partner.   They did state once before that if they couldn't they would "go it alone", but I personally think the current share price now rules that option out.   So no farmin partner, no future.   Cannot be simpler than that.   Put another way though, if we do find a partner, the current "deep discount" applied to the share price will unwind (either all, or in part) to or near that current valuation level.

So to make some sense of the current silence one can only assume that there either (a) is NO farmin partner (they have bolted), or (b) discussions are continuing.   Now if it was (a), then the company would be obliged to inform the market (at the time when those discussions ceased).  As this has not happened, we can only assume that it is (b), and that these discussions are perhaps exactly why there is stone cold silence from the company at the moment.   Let's just hope that is the case...

For those that missed it, here is some of the text from Hartleys (to fill in the time whilst you wait for the company to find the send button on the fax machine):
__________________________

EMPIRE OIL & GAS LTD (EGO)

In Search of the Kingia/High Cliff Sandstone

Empire Oil & Gas (EGO) is an established producer in the Perth Basin with an extensive acreage position. While production from Red Gully is in decline, additional near field exploration exists. Exploration interest in the Perth Basin has been revitalised by AWE/ORG’s discovery of over 400PJ of potentially recoverable gas at Waitsia in the Early Permian Kingia/High Cliff (KHC) Sandstone Play. In terms of potential exposure to the KHC Play we rate EGO’s acreage as the second most prospective after AWE/ORG. EGO to date has been the only Perth Basin operator to successfully produce commercial quantities of gas from the Cattamarra Coal Measures. This production has attracted MIN as a major shareholder and differentiated EGO from all the other pure Perth Basin junior explorers. However, the rate of production decline has accelerated over the past year and attempts (mainly RGN-1) to replenish this depleting resource has so far proven unsuccessful.

Kingia/Sandstone – We Rank EGO’s Acreage #2

There are a significant number of conventional and unconventional plays for operators to pursue in the Perth Basin. However, most while promising a lot, have delivered relatively modest success to date. AWE’s discovery of the Waitsia field has however once again revitalised interest in the Basin and existing permit holders have been scouring their own acreage for evidence of this new play. We have undertaken our own review of potential areas that could be prospective for the Kingia/High Cliff Play and rate EGO’s acreage as the most prospective of the smaller junior players (ex-AWE and ORG).

Valuation – Exploration Success is Obviously Crucial

Current corporate costs although not out of line with producing peers (circa A$3mpa) and net debt could become a concern as revenue continues to decline. The key chart below shows the potential negative NPV impact of current Corporate Costs running until the end of life at Red Gully. Obviously further exploration success in the near term is required to maintain this level of overhead. We rate EGO’s exploration potential relatively highly especially for the KHC Play, this potential exposure underpins our positive view on the stock and current valuation.


HIGHLIGHTS

EGO to date has been the only Perth Basin operator to successfully produce commercial quantities of gas from the Cattamarra Coal Measures. However, the rate of production decline at their Red Gully facility has accelerated over the past year and attempts (mainly RGN-1) to replenish this depleting resource has so far proven unsuccessful.

Current corporate costs although not out of line with peers (circa A$3m per annum) and net debt could become a concern as revenue continues to decline. Exploration success in the near term is required to maintain this level of overhead and to drive a re-rating in the share price.

Exploration interest in the Perth Basin has been revitalised by AWE/ORG’s discovery of over 400PJ of potentially recoverable gas at Waitsia in the Early Permian Kingia/High Cliff (KHC) Sandstone Play. In terms of potential exposure to the KHC Play we rate EGO’s acreage as the second most prospective after AWE/ORG. This potential exposure to the Basin’s current ‘Hot Play’ underpins our relative positive view on the stock and current valuation.

EGO OVERVIEW

EGO has exposure to an extensive spread of Permits extending over 9,000sqkm in the Perth Basin.

EGO’s existing production comes from the Red Gully Gas Plant, the Perth Basin’s only commercial development supported by gas production from the Cattamarra Coal Measures.

The Cattamarra Coal Measures (as again evidenced by the results from RGN-1) remain notoriously difficult to explore successfully.

In fact, exploration results over the past 60 years in the Perth Basin overall remain disappointing. However, as we have previously highlighted (CVN – ‘Mining for gas in the Bedout Sub-basin’ 12-April-2017) the WA gas market continues to be short ‘affordable’ priced gas. As a result, the Perth Basin continues to be of interest to both consumers and producers.

Despite good to excellent source rocks since the 1950s over 350 onshore and offshore wells have resulted in just circa 20 commercial oil and gas discoveries (and most are small and only one offshore).

There are four petroleum systems in the basin:

1. Permian (e.g. Cliff Head, Whicher Range)
2. Triassic (e.g. Dongara, Erregulla, Mount Horner, and Yardarino)
3. Jurassic (e.g. Walyering)
4. Cretaceous (e.g. offshore Gage Roads-1 non-commercial oil discovery)

The Permian (Late and Early) Plays represent the vast majority of commercial discoveries in the Basin. The Late Permian dominated up until the late 2000’s with recent successes more focused on the Early Permian reservoirs. According to work undertaken by Murphy Oil the average pool size for the Late Permian is 9mmboe and 33mmboe for the Early Permian. This increased prospect size is one of the reasons for the renewed interest in exploration in the Basin in recent years.

Given the quality source rocks widespread throughout the Basin, a high proportion of wells drilled (particularly targeting the Permian reservoirs) encounter hydrocarbons.

The Late Permian historical ‘technical’ discovery rate is circa 37%. However, as shown earlier, commercial discoveries have proven much more elusive. Extensive faulting and uplifting has occurred in the Basin, which has resulted in poor quality reservoirs and poor trap mechanisms.

Based on a study by Murphy Oil within the Late Permian play, trap failure is the most common reason for an exploration well failure (48% of the time), reservoir was not effectively developed in 24% of wells, charge was missing in 16% and non-trap related seal failure caused 12% of dusters. Even when adequate reservoir and trapping were present, a number of factors including the extensive faulting throughout the basin resulted in the relatively small pool sizes flagged earlier. Given the remoteness of the Perth Basin and resulting high costs, this has been another factor in the low rate of ‘commercial’ success.

Since the late 2000’s the focus of explorers has shifted from the Late to Early Permian Plays. This is partially the result of the potential for larger discovery sizes. However, the ‘technical’ success rate in the deeper Early Permian targets has been a much lower 17%. The causes for failure are varied, but most of the dry holes have been drilled off structure (highlighting the requirement for 3D seismic, which again can be punitively expensive in the Basin). The majority of wells also lacked effective reservoir (poor permeability and/or porosity) and breached traps.

We will delve into analysing the prospectivity of the Perth Basin in more detail elsewhere, but in summary it remains a very tempting target for exploration (driven by excellent source rocks and strong market conditions for gas) but with some very significant technical and financial challenges.

Against this backdrop, we view most onshore Perth Basin Players as being under resourced, given the scale of the challenge. EGO is the only Pure Perth Basin Junior E&P company currently in production and backed by Mineral Resources on their register they are in a very strong ‘relative’ position, not only in terms of accessing capital to progress exploration but also, if desired, to lead consolidation of acreage in the Basin.

However, perhaps the key differentiating factor for EGO versus other junior Perth Basin explorers is their potential exposure to the developing Kingia/High Cliff Sandstone Play in their EP 426, EP 368 and EP 432 Permits.

In our opinion, AWE/ORG have the majority of the most prospective acreage for the Kingia/High Cliff Play already permitted. In regards to exposure we rank EGO and NWE.asx next in that order.

(and see www.empireoil.com.au - Broker Reports - for the remainder of this report).
____________________

Hartleys do note, in the conclusion to their report, that  "We rate the Kingia/High Cliff Play as the number one opportunity in the Perth Basin currently. In this regard, AWE has most of the prospective acreage already permitted. Beyond AWE we believe EGO has the greatest potential with two drill ready prospects in permits EP 368 and EP 426. Additionally, with AWE now chasing Waitsia type targets to the South of the field we also see Kingia/High Cliff potential on the Cadda Shelf in EP 432. We remain cautious on the potential of the Cattamarra Coals, with Red Gully continuing to be the only commercial development to date from this play. The oil targets in North Erregulla, Raven and now EP 389 while obviously of some interest are not as high a priority as the Kingia/High Cliff. Overall EGO in our opinion (outside of AWE) has the best exploration portfolio among the other Independent explorers in the Perth Basin, with multiple Kingia/High Cliff targets, some oil potential and Cattamarra Coal prospects which could be easily commercialised through their 100% owned processing facilities."

They also note:

"Funding for exploration however will require a farm out and while this potentially could be a significant positive catalyst for the stock price, it also presents a risk if current plans for a farm out of its Kingia/High Cliff prospects cannot be achieved."

"In the absence of a farm out deal it is difficult to value EGO’s exploration potential. So, we resorted to valuing it on the basis of the ASX Markets Value for other pure Perth Basin explorers such as PGY.asx, UIL.asx and NWE.asx. On the basis of a direct read through from the value of this peer group we value EGO’s exploration portfolio and Perth Basin leading acreage position at circa A$19m."


Food for thought (whilst we wait for something from the company)....

Best regards
Kit