Empire Energy Group (ASX: EEG) is an oil and gas exploration and production company focused on onshore long-life oil and gas fields in Kansas and Appalachia, U.S.
It also holds seven exploration licence applications covering 14.6 million acres of prospective shale oil and gas acreage in the McArthur Basin, Northern Territory.
Empire Energy (ASX:EEG) has a proven track record in acquiring oil and gas assets that have gone on to add to its production and earnings and it is likely the same is true of its current assets.
The company is sitting on a substantial oil and gas resource in the Marcellus Shale in its large New York acreage, which is also host to the Utica Shale.
These shale’s are located within the larger producing Appalachia acreage that Empire owns, which still retains potential for further conventional upside.
Empire also holds oil producing assets in Kansas where a previous 10 well drilling program resulted in 7 new producing wells while the first 2 wells of the 2012 drilling program are both being completed for production.
Dwarfing these assets in sheer size is the 14.6 million acre (59,000 square kilometre) frontier exploration portfolio the company holds in McArthur Basin, Northern Territory, that is believed to be prospective for shale oil and gas.
Besides cash holdings of about A$4.77 million, Empire Energy retains a US$91.9 million (A$86.9 million) credit facility that it can access for future acquisitions and development drilling.
It also enjoys strong support from institutional investors with Macquarie Bank recently exercising more than 13 million options at A$0.12 and A$0.135 to increase its shareholding in Empire Energy to about 13%.
Empire Energy has proved and probable (2P) reserves of 15.8 million barrels of oil equivalent (MMboe) and proved, probable and possible (3P) reserves of 17.1MMboe.
It is also targeting production of more than 2,500boe per day by the end of this year.
Share price: A$0.23
Issued shares: 293.5 million
Market Capitalisation: A$67.5 million
Cash: A$4.7 million
EV: A$120.8 million
With a EV/2P reserves ratio of just A$7.64 per boe, Empire Energy is priced below many of its peers against a median sector average of 25x EV/2P reserves. Were Empire Energy to be at the median, this would see Empire Energy trading at a valuation of $0.60 - $0.70 (appropriately discounted).
Several factors are coming together that are likely to further increase the company’s reserves position and to increase its valuation.
First is Empire Energy’s track record of increasing earnings. The company increased its earnings per share to A$0.0268 in December 2010 from a loss of A$0.001 a year earlier, showing that it has the ability to meet its aim of increasing production to about 10,000boe per day by 2015 from current production of approx. 1,650 boe/d.
While the company has stated that acquisitions would account for about 4,500boe/d, its workover drilling programs in Appalachia and new wells in Kansas have the potential to make a strong contribution to this number.
The New York Department of Environmental Conservation getting the green light to once again issue permits for fracking in particular would allow the company to unlock the Marcellus and Utica shales, which have estimated resources of more than 70 million barrels of oil and 5 trillion cubic feet of gas in place respectively.
In the shorter term, low risk upside exists in its Central Kansas Uplift area, where the company has identified more than 30 new drilling locations and work over prospects.
Empire Energy is also working to increase production from its existing Appalachia wells by upgrading the transportation network, improving operational efficiency and carrying out workovers.
The first workover has already resulted in the Lantz-7 well coming on line with initial production of over 200 barrels of oil per day, which has stabilised after 6 weeks to between 80 to 100 barrels of oil per day.
Further success on another 3 or 4 workovers that result in flows of about 100 barrels of oil per day could almost double overall production at very low cost, further increasing Empire Energy’s valuation.
To top it off, the company is insulated from the decrease in U.S. gas prices, having hedged about 70% of its current production through to 2015 at a price of about US$5.85 per thousand cubic feet. Current U.S. spot prices are hovering at about US$2.20 per thousand cubic feet.
While U.S. gas prices have been trending down since the shale gas revolution begun, oil prices have remained high due to a combination of supply worries and the weak U.S. dollar.
Little wonder then that many shale focused players in North America have turned their attention to liquids rich shales.
Pioneer Natural Resources (NYSE: PXD) is spending 86% of its US$2.5 billion budget for 2012 on drilling in the Spraberry field, the horizontal Wolfcamp Shale, the Eagle Ford Shale and the Barnett Shale, all of which are either oil-bearing or liquids rich, while BHP Billiton (ASX: BHP) has also admitted it would be focusing more on liquids due to depressed gas prices.
Spot crude prices are currently trading at about US$108 per barrel and while Empire Energy’s active hedging means that about 68% of its oil production through to 2015 is hedged at about US$90 a barrel, it still retains exposure to the higher prices while being insulated from potential downsides.
Bruce McLeod serves as executive chairman and chief executive officer, and has had over 20 years of experience in the acquisition and rationalisation of listed and unlisted companies, as well as raising debt and equity capital for resource projects and other companies.
Dr John Warburton serves as a director and is CEO of Imperial Oil & Gas and has 27 years of technical and leadership experience in international petroleum E&P, including 11 years with BP. Has also published 28 internationally recognised technical articles on oil exploration issues. Dr Warburton is focusing on the company’s Australian shale licences in The Northern Territory.
Empire Energy's Appalachia Basin assets abut Lake Erie and Lake Ontario in the north and extend across the state of New York and into Pennsylvania in the south.
The 2,000 wells in more than 300,000 acres give it substantial reserves, steady production, low risk upside development and access to a large shale oil and gas resource.
These wells produce about 7 million cubic feet of gas and 160 barrels of oil per day.
Most of the gas wells produce from the Clinton/Media and Queenston formations which lie between the Marcellus and Utica Shale formations.
In mid 2011, the company started a program to review its existing wells to identify up hole development opportunities, focusing on the Bass Island Formation, which is a known oil and gas producing trend that has been difficult to target.
As part of this review, Empire Energy has carried out a workover program with the first well, Lantz-7, proving to be a success.
Lantz-7 is currently flowing about 80 to 100 barrels of oil per day. Well control has been established and at times the well has been run intermittently to reduce potential paraffin build up that has been an issue in other Bass Island producers.
Empire Energy also has the option to drill wells on the hundreds of proved undeveloped locations in the Basin to boost gas production should prices recover.
However, it is the 220,000 acres of potential oil bearing Marcellus Shale and 180,000 acres of Utica Shale the company holds in the Appalachia Basin that is arguably more exciting.
Independent technical studies have confirmed that the Marcellus Shale acreage held by Empire Energy includes a transition zone from wet gas to oil within more than 100,000 acres that has estimated resources of more than 70 million barrels of oil.
The shale also includes a gas zone that has been currently defined over 20,006 for a possible resource of 199.4 billion cubic feet of gas in place.
Meanwhile, the Utica shales cover 186,240 acres and is believed to hold more than 5 trillion cubic feet of gas in place.
While a program to explore and tap a large part of this resource is contingent on the New York Department of Environmental Conservation being given the green light to once again issue permits for hydraulic fracture stimulation work to be carried out, these shales nonetheless represent a major play for the company.
Empire Energy’s other production asset is its Central Kansas Uplift leases which cover 18,000 gross acres over 16 counties.
These currently produce about 624 barrels of oil per day from 256 wells targeting the Arbuckle, Kansas City, Lansing, Viola and Shawnee formations.
Further production boosts may come from the 10 development wells and 5 polymer recompletions the company plans to drill and carry out this year.
Each well targets production of 30 to 40 barrels of oil equivalent per day with ultimate recoveries of more than 50,000 barrels of oil.
The company has 16 proved developed non-producing wells to be reworked, 31 proved undeveloped drilling locations and 56 probable locations.
Empire Energy is also looking to increase its proved and probable reserves from the current 4.8 million barrels of oil equivalent by reviewing existing assets and targeting other formations there as well as identifying new assets for farm-in or acquisition of development acreage.
It has an average 74.5% working interest in the leases and is operator of 99% of the leases.
Empire Energy also participates in the Sherwood Shoreline Project in the Williston Basin, North Dakota.
The project targets the Mississippian Mission Canyon Formation with the Sherwood Member the primary objective and the Bluell Member the secondary objective.
Stratigraphic traps in these members are highly productive within the project area, having produced more than 19 million barrels of oil from 150 wells.
The first 2 wells in this area have been drilled. The initial well was plugged and abandoned as it missed the target zone. The second well is being completed, although work has been delayed while completion alternatives are reviewed due to the lower than expected porosity of the target formation.
Empire Energy has a 35% operating interest in the 17,000 acres Sherwood project, which is operated by Vecta Oil & Gas.
At the early stages of exploration is Empire Energy’s massive 14.6 million acre (59,000 square kilometre) slice of the McArthur Basin in the Northern Territory that is believed to be prospective for large scale shale oil and gas plays.
This could be a “sleeper” in Empire Energy’s portfolio given the intense interest in the McArthur Basin and latent realisation of the prospectivity.
While no petroleum exploration has been carried out on the assets, a mineral core hole on an adjacent lease had sustained a 6 metre gas flare for about 6 months, burning an estimated 1 billion cubic feet of gas in this time.
The target gas resource is in 1,640 million year old Palaeo-Proterozoic organic-rich black shales of the Barney Creek Formation.
These shales could hold more than 14Tcf of gas along with multi million barrels of oil.
Empire Energy’s 100% owned subsidiary Imperial Oil & Gas is currently carrying out land holder negotiations and building a technical team to carry out grassroots exploration.
Despite substantial upside potential in its U.S. and Australian assets, Empire Energy’s EV/2P reserves ratio of just A$7.64 per boe means the company is priced below many of its peers with a median sector average of 25x EV/2P reserves. Were Empire Energy to be at the median, this would see Empire Energy trading at a valuation of $0.60 - $0.70 (appropriately discounted).
However, track record of increasing production and earnings will bear it in good stead as it prepares to ramp up its workover program in Appalachia and drilling new wells in Kansas.
These, together with the goal of acquiring new assets to boost production, are likely to push Empire Energy towards its stated goal of increasing production to about 10,000boe per day by 2015 from current production of about 1,650boe/d.
The company also has potential to unlock large shale oil and gas resources in the Marcellus and Utica shales in its Appalachia acreage as well as the shale potential of its Northern Territory assets in the longer term.