Opportunity? - What has changed? (aside from the share price)

Let me quote from Hartley's Report of 18th October 2016:

EMPIRE OIL & GAS LTD (EGO)

RGN remediation about to begin

The recent weakness in the share price of Empire oil & Gas (EGO) represents an opportunity for investors ahead of the RGN-1 well remediation work. Upon success, EGO would be able to quickly tie the well into the Red Gully gas production facility, located 4km away from the well. We maintain our Speculative Buy recommendation on EGO with a 12-month target price of 57cps (previously 67cps).

Remediation work on RGN expected to begin shortly

Remediation work on the RGN-1 well is expected to begin mid- November. EGO hope to correct excess water production caused by poor cementing around the 7” casing. Following diagnostic testing, EGO has a better understanding of the subsurface issues, and is therefore confident the remediation work will be successful. The work-over rig has been contracted and final environmental and safety approvals have been submitted to the DMP (regulator). The estimated cost for the work-over and well test is estimated to be A$2.9, of which A$0.45m has already been spent.

Assuming remediation work is successful, a production test will then be carried out on the Upper D and C sand. The 7.5PJ of contingent reserve can be easily tied into the Red Gully production plant, which is only 4km away. The RGN-1 well was drilled in late 2015 and discovered 53m of net gas pay.

Balance sheet and debt

During the September Quarter EGO finalised the terms of a revolving working capital facility with MIN. The A$15.1m facility refinanced the ERM Power debt facility which was due to expire on the 31st of August. The MIN facility has a 3-year term with an interest rate of the Bank Bill Swap Rate plus 5% (currently 6.74%). On or prior to drawdown MIN received 7.5m unlisted options with a strike price of 50c and expire 2-years after issue (11 Augusta 2018).

Exploration activity

EGO’s most promising exploration targets are located on EP368 and EP432. The Lockyer Deep / North Erregulla Deep prospect is located adjacent to Waitsia gas field (2P-2C 630bcf), discovered by AWE earlier in 2016. The target has a prospective resource of up to256bcf with EGO hoping to drill in 2017. The primary target of the well is the Kingia / High Cliff play. Historical wells in the area encountered hydrocarbons at the Dongara Sandstone level (North Erregulla-1 and Lockyer-1 wells).

Valuation

We have reduced our valuation on EGO to 57cps from 67cps, because of the increase in net debt. At the core of our valuation is the Red Gully gas operation, valued at A$42m or 35cps. The remainder of our 57cps valuation is made up from Red Gully North (18cps), Gin-Gin East and other exploration (16cps). We currently use a 70% risk factor on Red Gully North (RGN). Should the remediation work be successful, our valuation of RGN would increase from 18cps to 26cps. Net debt at the end of FY16 was A$12.3m (10cps). Risks associated with our recommendation include a failure to rectify issues at RGN and a decline in gas and condensate pricing.
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Ok.   Now rather than everyone piling-in to say how much they don't like the company, I would appreciate it if we can have some constructive discussion for once.   Please also refrain from bagging Hartleys as those guys are one of the few to actually put pen to paper on this (so if you don't like Hartleys, please ignore this whole thread, I beg you).

Clearly some things have changed since October 2016, aside from the share price which has slid from 31 cents (@18/10/16) to 15.5 cents (@25/5/2017).  Taking into account net debt ($12.911m, being $15.1m loan facility less current net cash at bank), this values Empire at circa $28,721m (assuming zero value on options), equating to 28 cents per share on a gross basis.  This is down from total EV (excluding options) of $43.6 cents per share when Harleys wrote their report.  So although the share price has halved, the EV has actually declined by 36% over that time.

The million dollar question (actually, the $15.75 million dollar question) is WHY (and how does the status quo differ from the status at the time Hartleys penned their report).

Rather than me answer that question, I would like to hear some thoughts from everyone on whether that devaluation is warranted, or just a temporary dip (and therefore some value to be had at current levels).   Right now I am not "neck deep" in this thing, but am considering throwing some reasonable resources into this one as I have formed my own opinion but am held back by the air of negativity coupled with the vacuum of information coming from the Management of Empire.

Thoughts??




(NB: please make responses on this thread constructive or at least backed by fact:  getting rather sick of all the rubbish I read on the Empire threads).