Empyrean Energy PLC (EME) is a small Australian oil 7 gas exploration company with huge potential upside if it can succeed with the drill. The company has big hopes for black stuff turning into gold, or wads of cash for investors and the board. The CEO, Tom Kelly, has serious skin in the game.
Empyrean first attracted my attention just over 5 years ago when it had USA shale exposure, a time when President Obama and subsequently Donald Trump were well on the way to turning the USA into an energy-independent country. Since then, the company sold off the shale assets, repaid all its debt, returned capital to shareholders and then embarked on an ambitious grassroots exploration strategy with a focus on proven hydrocarbon basins in energy-hungry Southeast Asia. Its first foray back into exploration saw it awarded the Block 29/11 in China in late 2016. In 2017 Empyrean teamed up with Conrad Petroleum to make the Mako Gas Field discovery in Indonesia. Additional USA gas exploration targets were also added to the portfolio.
Empyrean, like so many natural resource companies, had fallen out of favor with retail investors and the city in general with the volatility in oil and gas prices in 2020 when COVID hit. The retail investor turned to Covid-related stocks, and companies like Empyrean were largely forgotten by the investment community, other than the diamond hand crew that remain loyal to the company, many of them can be seen contributing with their POV to this day. However, it is not unreasonable to expect significant upside from Empyrean over the coming weeks, particularly as the eagerly anticipated drilling campaign on its high impact Jade prospect in China starts in December.
The world is turning to greener energy
There is no instant answer to the replacement of oil and gas. Solar and wind remain intermittent sources of energy and have not yet provided a winning formula for the base load capacity that our modern cities currently use and desire. Despite great leaps forward, storage of renewable energy remains a challenge. Climate activists also argue against coal and nuclear power. Germany has been a lesson for us all and despite a valid attempt to go green it is now back to burning coal more coal than it set out to.
Meanwhile, China is the world’s largest oil importer, importing 8.4mmbbl/d in 2017 to satisfy its continued economic expansion, with this figure forecast to increase by 17% over the next few years, and Empyrean’s next major drilling campaign is targeting approximately 400 million barrels of light sweet crude oil at the Jade Prospect, right next door to a billion-barrel field and several multi hundred-million-barrel recent discoveries.
It’s the right location. Empyrean have done the technical work to de-risk the prospect and give its shareholders the best possible chance of being part of a Company-making, multi-bagger at Jade with a follow up prospect called Topaz that is twice the size again. The risk vs reward potential here is very compelling. What’s not to like about Empyrean?
Now is a better time than ever. That comment may seem a tad bold, risky even! Well, (no pun intended) natural resource stocks are usually on a higher scale of risk, more so when the market value is around the £35 million mark.
What is so different this time around?
Timing for one thing, the company has moved things along a tad. The big hope has always been its 100% owned working interest, Jade Prospect, Block 29/11. Jade is located at the Pearl River Mouth Basin in the South China Sea. Before your heart sinks at the thought of an asset off the shores of China, this fact is actually a deal maker, not a deal-breaker.
By luck or design, Empyrean has partnered with a major resource player, none other than Chinese-owned China National Offshore Oil Corporation (CNOOC), which may assume a 51% participating interest in the development and production phase. This de-risks Empyrean, even though the company is UK-registered. And while some UK/Australian companies are finding it difficult to trade with the Chinese, Empyrean has no such issues due to the Company’s Executive Director, Gaz Bisht, having a long and productive relationship with CNOOC, a relationship that sets Empyrean apart from its peers.
China, and CNOOC want foreign companies to discover oil in China under the 51% back in terms that have served them well for decades now. Moreover, China cannot get enough oil for its industry.
Excitement Set to Gush?
Empyrean has secured a drilling rig for December this year. Moreover, the drilling contract for the Jade Prospect includes a significant Christmas target Spud Date between 15th – 30th December. The company has CNOOC approval ahead of the award of an Integrated Drilling Contract (“IDC”) to China Offshore Services Limited (“COSL”) and all parties are aligned in the targeted timing to drill the Jade Prospect in mid to late December.
COSL were successfully used by Empyrean to acquire modern 3D seismic shortly after Empyrean were awarded the Block 29/11 permit. The 3D seismic has allowed Empyrean to significantly de-risk the Jade and Topaz prospects. On the 3D, Empyrean can see that Jade and Topaz share important similarities with the recent CNOOC discoveries immediately west and close by to Jade and Topaz.
The discoveries have ‘gas clouds’ sitting immediately above the target reservoir rocks. Empyrean’s Jade and Topaz prospects have similar ‘gas clouds’ showing on the modern 3D seismic. I won’t bore you with the technical reason for this but, put simply, the nearby discoveries have gas clouds. The nearby dry well failures do not have gas clouds. Empyrean’s Jade and Topaz prospects have gas clouds. Enough said.
The Jade Prospect will cost US$12.3 million to drill, significantly cheaper than the expected cost of $18.5million. Empyrean recently raised US$6.92 million, so the remaining drill costs are well within reach. The Jade prospect has been assessed by Gaffney Cline to have an Oil in Place (STOIIP) potential of 225 MMbbl (mean) with an upside case of 395 MMbbl (P10).
Naturally, the clock is now ticking and thus I expect investor interest to start picking up over the coming weeks. Indeed, this has already started. There are a few reasons for this; of course, the drilling campaign always has the retail investor seeking a flutter during the lead up to spudding the well. The risk vs reward here is very enticing and success can deliver a multi-bagger with Jade and a double whammy bonus should Topaz also be successful.
However, there is more to this than the thrill of the drill at Jade. Empyrean has already made the Mako Gas Discovery in Indonesia which provides a neat little slice of downside protection for the punters – something that most exciting exploration programs are lacking!
Funding
I spoke to the CEO, Tom Kelly last week. He explains to me in some detail his strategy moving forward, which included the possibility of further funds arriving from warrants he had carefully structured into the last placing, which are triggered at a strike price of 12p.
The Company announced on 9 July 2021 that it had raised gross proceeds of £5.02 million ($6.92 million) through an equity placing and that the net proceeds would be used to secure a suitable drilling rig and order long-lead items, as well as for the Company’s general working capital requirements. However, unless the warrants are exercised, the company will require further funding, via a joint venture, or from an equity raising to enable it to undertake the drilling of the Jade Prospect.
Assuming Empyrean’s shares start to kick in anticipation of drilling, warrant holders are unlikely to pass up on this offer, and thus reduce the risk of further dilution. Tom Kelly has pulled a few rabbits out of his hat over the last 15 years and waiting around for a cheap placing could see investors miss the boat, given that there is plenty of success case upside from the 12p warrant exercise price, with at least one analyst valuing the success case for Empyrean above 250p.
Tom explains the drilling is straightforward and should take circa 25-days to reach the targeted depth. Throughout this period the company should get an early indication when “oil shows” are seen on logs or fluorescence is seen in the mud cuttings from the drilling. Once target depth has been reached, the company can then run extensive combo logs; this will indicate if they have an oil column to test. If they indicate there is an oil column, a further circa 12-days of flow-tests is likely. Of course, this has the potential to be a very exciting period, and who knows where the share price will be? Significantly ahead of the warrant’s price, I would wager.
Empyrean has 100% working interest during the exploration phase now, with partner CNOOC able to assume 51% interest in the project at the development and production phase if a commercial discovery is made. Empyrean would then have a 49% interest in the project if it does not farm out or JV prior to drilling.
Once a discovery is made, Empyrean is likely to keep its options open and effectively the world is its oyster at that stage. Empyrean could choose to develop its 49% level or farm out a portion of the project to fund the development or to fund exploration on the Topaz prospect, which is targeting over 800 million barrels of oil and will be seriously de-risked by success at Jade.
Empyrean’s Gas Discovery provides downside protection
Empyrean also has an 8.5% interest in the Duyung PSC in offshore Indonesia where they discovered the Mako Shallow Gas Discovery. Successful testing operations were completed at the Mako South-1 Well with 10.9 million cubic feet of gas flow and better than expected reservoir quality and multi-Darcy permeability. Two further wells have fully appraised this gas discovery. The operator is currently working hard to secure gas off take agreements that will allow a more accurate valuation of the Gaffney Cline certified 2C resources (roughly 500 bcf gas).
Energy prices in Europe and Southeast Asia on a tear
With a supply shortage looming and oil and gas prices on a rising fast, Empyrean may just be drilling the exciting Jade prospect during a perfect storm. My guess is that the cheap entry is between current market and 12p.
Finally, with news on Tuesday Empyrean has awarded a site survey for its Jade Prospect, which is estimated to have over the 225mmbbl to China Oilfield Services Limited (COSL). The award of the well site survey contract marks another important milestone for Empyrean as the Company moves towards the drilling of the Jade prospect in December 2021.
In a morning note by house broker Cenkos, they explain any exploration success at Jade would see its risked valuation of the Jade prospect increase from 9.9p to an estimated c41.8p, a c4.2x increase. Success at Jade would also significantly de-risk both the adjacent Topaz and Pearl prospects. Unrisked (the point at which there is 0% risk). Moreover, the valuation of the Pmean resources at Jade would increase to c83.7p.
With all but one of the adjacent CNOOC oil discoveries “filled to spill”, their recoverable resources are close to the P1/P10 oil in place volumes. Assuming a P10 oil in-place volume for the Jade prospect increases our unrisked valuation from an estimated c83.7p to c135.7p.
