EGO Valuations

Good morning EGOites!

Now that I am officially back on this horse (with the proverbial ferret spotted dining at Hot Box Noodle in downtown Carnarvon last night), I guess now would be an appropriate time to open a discussion on valuations, projects, funding, and the previous RISC reports.

I spotted Hartley's research from 15th January 2016 which provided a rough-n-ready share price valuation based on NAV.   It showed the following:

	Column 1	Column 2	Column 3	Column 4	Column 5
0	A$m	Un-risked (NAV $m)	Risking	Risked (NAV $m)	CPS Valuation
1	Red Gully Gas Plant	$42.9	100%	$42.9	38.37
2	Red Gully North (RGN)	$19.4	50%	$9.7	8.67
3	Gin-Gin East	$48.8	20%	$9.8	8.72
4	Other Exploration			$10	8.93
5	Cash (31-12-2015)			$12.9	11.51
6	less Debt (31-12-2015)			-$14.4	-12.89
7				+$70.9	=66.30cps

Note that Hartley's valuation did not simply divide Net Assets by the number of shares and options, but if they had done so it would have arrived at a very similar figure ($71.3 million / 112 million = 63.66cps).

So, the million dollar question is: how accurate is Hartley's valuation, given that the corporate outlook has improved since January, and our new White Knight has arrived in the form of MIN? (allowing for perhaps better terms on refinancing, and perhaps improved farmins, exploration financing, etc.).

With regards to the RGN valuation, the recent comments by Aitken display a high degree of confidence (admitedly, something that EGO has never lacked, even when wells were known to produce nothing but mud!), so perhaps leaving the 50% risk-rating in place for the time being is appropriate.  That said, the circa $3.517 million of remediation costs (refer Appendix 5B of Q2/2016 forecast: Exploration and evaluation cost estimates) can be sufficiently financed from the current cash inflows (refer my post of 16/06/16 at 17:51:17) so one could reasonably expect that further work on RGN will go ahead soon, and we should soon hear of progress.

The other two big question marks are around Gin-Gin East, and what Hartley's call "other exploration".   In the case of GGE, it is worth reading back over EGO's publications (which include references to the RISC Independent Resource Evaluation Report of January 2015) which note contingent (2C) resources of circa 5.5PJ, with prospective (P50) at a very nice 24.4PJ (hence Hartley's un-risked valuation of $48.8 million - which is actually greater than the current RG1 valuation.   On a risked basis, however, Hartley's have assigned a value of only $9.8 million to GGE.   A de-risking to 50% however (which the market tends to do when spudding - as a pre-emptive guess) would see an additional $14.6 million added to the NAV (in essence meaning a spud at GGE should see the SP climb around 13 cents as an initial reaction - a number which aligns to what we have previously witnessed when EGO spuds a new well).

With regards to "other exploration", I assume Hartleys have carefully examined Lockyer Deep (EP389), which would most likely be financed by way of farmin (which could now include MIN participation, so the terms may be more favorable than previously thought).   Lockyer itself deserves some de-risking, based on the previous success of the North Erregulla 1 previously operated by Wapet P/L, the recent AWE Waitsia discovery, and the previous oil plays in Dongara/Wagina.   Not too much is known about Lockyer (by us at least), however EGO has previously used phrases like "High impact Kingia gas play" to describe it.

Additional to Lockyer, we also have EP423 (Raven), which EGO notes has "low cost development potential" due to its proximity to existing facilities.  From what I can make out, very little attention was given to Raven by Hartleys, so the upside there is yet to be discussed or unlocked.

So on the matter of Hartley's $10 million total valuation for "other", I personally think this is very conservative and probably assumes a risking of between 10% and 20%.   We could comfortably add a further $10 million to the valuation once farmins or project formalisation(s) are announced (i.e. de-risk by a further 10% or thereabouts).

So, assuming we are starting to de-risk some of the current projects (including RGN completion, GGE, and others), an adjusted (prospective) valuation may look something like this:

	Column 1	Column 2	Column 3	Column 4	Column 5
0	A$m	Un-risked (NAV $m)	Risking	Risked (NAV $m)	CPS Valuation
1	Red Gully Gas Plant	$42.9	100%	$42.9	38.37
2	Red Gully North (RGN)	$19.4	50%	$9.7	8.67
3	Gin-Gin East	$48.8	50%	$24.4	21.79
4	Other Exploration		20-30%	$20	17.86
5	Cash (Projected 30.06.16)			$3.09	2.76
6	less Debt (31-12-2015)			-$14.4	-12.86
7				+$85.69	=76.51cps

That all said, please note that the estimate of 76.51cps is based purely on speculation that (a) RGN will be resolved in the near future (note that the Risking could increase, which has the potential to increase the valuation further though), and (b) there is some movement (soon) on the other prospects.   I am reasonably confident that with MIN on board the "laggard nature" of EGO will also be resolved, and we will see some of those other projects addressed with more haste.

So what's the point of all this rambling?   At worst, what we have done is gone part way in testing / confirming Hartley's valuation of 63.30cps, which has potential medium-term (12 month) upside to around 76.51cps.   Remember though that these are all based on "valuations" which sometimes have absolutely nothing to do with the actual market price for the stock!   But what it does show us is that at 40cps (as at yesterday's close) the market is continuing to heavily discount Empire (by around 37%) - a discount which I think is no longer justified with the arrival of MIN on the scene.  With that in mind, I think further de-risking of the corporate entity will take place in the near term, which should see us move towards that 60cps area (all things being equal, of course).

Happy to have others provide their valuation ideas and thoughts; happy to be shot down by logic, if such thing exists in this market!

Best regards to all.