Emperor Oil: A Junior on the Cusp of Strong Production Growth in East Africa

Oil and Gas exploration in East Africa comes with some risk, but offers huge potential rewards in return.  That’s particularly true for junior companies who can secure large acreage positions with world-class oil prospects.

But it can take years just to assemble the land and shoot seismic. These companies also need to have deep pockets since an exploratory well can cost in excess of $10 million. No chump change for a junior taking on a high level of risk.

The odds only favour a few; Africa Oil (TSXv-AOI) is one such junior running from $2 to $11 last year after making a huge discovery.

Emperor Oil (TSXV-EM) could be another company; it recently signed a MOU on a large block of land in Sudan’s Rawat Basin.  Unlike Africa Oil however, Emperor’s production could be up and running in less than a year with no exploration risk and for a lot less money.

The reason is that Emperor Oil’s acreage comes with 3 commercial discovery wells with 95 million barrels of recoverable oil. The reserves, assigned by an independent petroleum engineering report (NI-51-101), are limited to a small 20 sq km area where the 3 wells are located. Emperor Oil owns 42.5% working interest in a 10,000 sq km concession known as Block 7.

The company will recomplete these wells at a cost of approximately $500,000 per well – that’s a maximum of $1.5 million with zero exploration risk.

Each of these wells could flow 10K bopd based on equivalent wells in Southern Sudan. Production would initially be restricted to 2,000bopd since it will be trucked. The company’s 3 wells are 60km away from a central processing facility where the main export oil pipeline passes through towards Port Sudan on the Red Sea. The oilfield would have to be connected by pipeline to the main processing facility before pumping the wells at maximum capacity.

Emperor is working in the Rawat Basin, which is part of the greater Melut Basin to the south, a proven producing basin currently responsible for 350,000 bopd. Advisory board member Mr. George Fulford, P.Eng, a geologist and geophysicist with years of experience in Sudan, believes there are several oil fields in Emperor’s Block 7 in the Rawat Basin waiting to be discovered:

“there are several geological areas with almost identical geophysical features as those existing in the Rawat Basin Oil Field, each with similar oil bearing traps recurring every +/- 20 kilometres”.

sudan emperor oil

In the near term, Emperor Oil could be producing up to 2,000 bopd net by the end of Q1. That’s a quick ramp up from zero given the company acquired Block 7 back in September 2012. It sounds too easy but there’s more to the story than the low risk, low cost development potential here.

This is where Emperor’s team comes in.

Block 7 was secured thanks to John McLeod, a director with Emperor Oil. John is well connected in Sudan having worked more than 10 years there. Some of the guys he trained back in the 1990s are now part of SUDAPET’s management (Sudan’s National Oil Company).

This largely explains how a small junior company ended up as operator of a block that has seen $120M spent by SINOPEC and PETRONAS, Block 7’s previous owners.

The former founder of SUDAPET also sits on the advisory board, between him and John they have more than 500 wells drilled in Sudan.

What that means is–there are a lot of good relationships here.  That is so important in Africa.

Sudan’s civil conflict ended with Southern Sudan separating from the North following a referendum in 2011.  Prior to breaking up, Sudan produced 450,000 bopd and had 6.7 billion barrels of proved oil reserves comprising ~0.5% of the entire world’s reserves according to the BP Statistical Energy Survey.

The secession of Southern Sudan has been positive for the oil and gas industry. For one, it brought stability as the risk of armed conflict between the 2 states has been reduced. The North can now focus on rebuilding its oil production currently estimated at 140,000 bopd. Southern Sudan kept pretty much 75% of Sudan’s reserves and production.

The regional stability will allow production and exploration to reach its full potential in Sudan.

This bodes well for Emperor Oil as its acreage is largely unexplored. 

The company has so far identified an inventory of six undrilled prospective oil fields within Block 7. These are targets that are geologically similar to the three well discoveries. The fourth well is expected to spud by the end of the year and would cost around $3 million. These wells are cheap as the targeted oil reservoirs are located at a shallow depth of 4,500-5,500 feet.

The oil is 32 API which fetches Brent pricing less $10 a barrel—about $105 a barrel right now. That’s in contrast to Alberta producers who are selling light oil at $91–$24/barrel less.  That’s a big increase in cash flow for Emperor.

But to get the market’s attention, management has to prove that it can successfully operate in this country and execute on its plans. The market wants to see the ball rolling with first oil.

Emperor Oil has the right ingredients for success; it raised almost $14 million, it is focusing on low risk, low cost wells with proven oil in place. It also carries the right people on board. The company has the potential to take production from 0 to more than 10k bopd net in less than 2 years.

The upside in the stock is directly related to execution. Emperor Oil has the potential to be a second Africa Oil success story except in a much shorter time frame provided geopolitical risks remain subdued.

15 comments to Emperor Oil: A Junior on the Cusp of Strong Production Growth in East Africa

  • It seems a compelling story.
    However, I wonder why it dropped today 34% on big volume
    Vol / Avg. 3.14M/299,984.00

    • Mich

      No reason that I am aware of!

      Remember the risk here: deal still under MOU and they’re located in an area with geopolitical risk.

      This is where it will hurt if any of these 2 goes wrong…

  • WC

    Very interesting story. I had a look at the website and found it interesting that the MOU was extended to Jan. 31. Strange that it’s now almost 2 weeks later than that and no actual confirmation of the deal being finalized.

    Perhaps this delay is the reason for the pressure on the SP?? If the deal is finalised then just execution /GEO risk?

    • Mich

      This could be it, there are 2 important milestones here:
      1. deal finalized
      2. first oil

      this is where the company takes off PROVIDING Sudan and South Sudan are not tearing each other up.

      The delay in closing the deal might be testing investor patience here. On the other hand this is Sudan, not surprised delays creep in, this is not New Zealand :)

  • The Engineer

    I suggest that any potential investor read the competent person’s report released to sedar on 18 Jan. 2013. Don’t know where you got the information that these wells could potentialy flow 10,000 bopd. These wells were DSTed after discovery and although the results are not mentioned in the report they do forecast production as follows:

    “Production is forecast to commence in February 2013 from three wells at an initial total rate of 1,000 STB/d in the proved case and 1,750 STB/d in the proved plus probable case. It has been estimated that locations in the Rawat area will have an average initial rate of 700 STB/d, while locations in the Wateesh area will have average initial rates of 350 STB/d. Production is expected to begin an immediate decline to an eventual economic limit. On production dates and initial rates for the locations to be drilled are presented in Table 2″

    From an initial read through this document it’s not clear how the Gross developed reserves of 854,000 Stb (Table 2) are reduced to net 121,000 STB (Table 1) considering that they have a 42.5% of revenue. This is a PSC system so a more sophisticated model is required. I do draw your attention to NPV values (discounted at 15% to account for country risk) is only $68,000 for the proved developed reserves and it’s not clear whether the $2,000,000 bonus at commercial production has been paid to get this value

    • Mich

      You bring up a very interesting point Engineer. My understanding was these wells >could< IP at 10k and settle around 5k based on geologically similar wells in Southern Sudan.

      Obviously, I am not a geologist/geophysicist or anything close to that. So when I was researching the company, I relied heavily on the CEO for information.

      I also got the article approved by Emperor Oil CEO Andrew McCarthy before I published it in order to have the most accurate info included.

      The initial 1,000 STB/d could be the restricted rate mentioned above? since production will be trucked initially until a pipeline is built sometime later in the year.

      As always, appreciate your feedback,

  • @Mich, thanks for the interesting update. I’ll keep my investments in Canada. My wife and I joke, that if I visit an African country, serious violence or war will break out in a few months after my visit. True of Central African Republic, Cote d’Ivoire, Chad, and Kenya (the Odinga incident). The exceptions have been Cameroon (escale), Niger (escale), Togo and Burkina Faso. So 4 for 8. 50% became war zones.

    I can imagine what would happen if I invested in a country like Sudan.

    That said, I’ve heard the enterprising investor can make a lot of money in Africa and other places with extreme geo-political risk. But for me, I prefer the severely undervalued Canadian safe zone with my money. Like HYX: see their latest presentation where they estimate their NPV at $11.15, meanwhile their stock price is still range bound at around 50 cents. So even if only half of that upside could be realized by the investor it would be a tenfer.

    • I should also mention that the area of South Sudan that you show the block 7 drilling areas is probably considered “East Africa” for linguistic reasons (as it is an Anglophone area, along with Kenya, Tanzania and Uganda). It is however very proximate to “Central Africa” bordering on Central African Republic and Congo. This block of Central African countries, along with Rwanda, Burundi and Uganda, easily represent over the last twenty years, the worst area in the world in terms of geo-political risk. Over six million deaths in Congo as the result of war; Uganda (last I checked) and CAR are countries which are partitioned with rebels in control of certain parts (CAR made recent “peace” agreement with rebels); Bangui which I visited a dozen times is rated the second worst city in the world in terms of living conditions–and the President can’t maintain security outside of the capital. Rwanda was the scene of bloody genocide that probably resulted in a million deaths.

      These parts of Africa suffer from unjust structures, particularly affected by tribalism and nepotism. This means that violence can erupt at anytime, because of the lack of cohesion amongst the various competing factions that divide on ethnic lines.

      With the recent deaths at a gas plant in Algeria, the geo-political risk may become too much for junior companies to handle, with insurance rates increasing, and essential personnel unwilling to risk going there. An investor in such countries, in my opinion, is also partially responsible if important employees are kidnapped or murdered while working sur le terrain, because your investment is also contributing to their being in the country. The risk all over Central Africa is very high because many of the factions are islamic groups, some with terrorist ties. I.e., the same thing that happened in Algeria could happen in multiple locations in Sub-Saharan Africa because the political leadership may not be adequate master’s of their countries’ security.

      • Mich

        Very nice walk-through on the area of central africa. Sudan is officially in East Africa, they don’t speak english but a dialect of arabic there.

        From my discussion with the CEO, some of the team members have worked there since the 90s. They have not experience any violence in their area. You have to remember the army will do whatever it takes to protect and increase oil and gas production, so they might be getting preferential treatment.

        Besides that, geopolitical risk is high and there’s no doubt about it.

        • English was the colonial language. Yes, Arabic is the main language–most everyone there speaks it. In the South numerous languages are spoken. The area on the map is pretty “central”. My point is that Central Africa is a very dangerous area of the world and Sudan is very “central”. It is in the place in the world which I think has the greatest geo-political risk (after Quebec of course).

          I have a friend who is a refugee in CAR from Sudan. He has spent most of his life in exile, first as refugee in Congo where he spoke Lingala, later in CAR where he learned Sango. When confronting rebels at the school where he worked, he was one of the few who was willing going up to them and speaking to them. I asked him if he was afraid. He said no. The next day I was puzzled by that and asked him why not. He said, “Because they were not shooting at me.” When he left Sudan, they were indeed shooting at him.

          Your readers will invest according to their individual risk assessment and tolerance. This area of the world is clearly for venture capital only and you are up front about the risk. My reactions are aimed at helping people who don’t know the region to get a better grasp of what they might be getting into. People are making a lot of money in Africa. I am not one of them, because my experience of Africa has affected my personal risk tolerance.

    • Mich

      Peter,

      I’ve been looking into a few companies outside of Canada, EM was one of them. Usually when I write about one it’s because I took the time to investigate and spoke with management. Just part of my research…

      wow, 50% became war zones, that’s a scary number! Limit your presence to escale only in Africa :)

      The Canadian energy sector is in the toilet, maybe a keystone XL approval would move things. Besides that, it’s hopeless….and will get worse before it gets better in my opinion. Big money seems to be moving out of the sector/country (Fidelity exiting PRY as an example)

      HYX, IMO, won’t live long enough to see half of that NPV realized. They will be taken out way before that. At what price? who knows!

    • @Mich, yes, you always do your research and you are doing a great job. Thanks. The above post is well done and gives hope that perhaps some of South Sudan has a chance at a peaceful, prosperous future–but not if the jihadists have anything to do with it.

      Yeah, you are right: I should limit my visits to African countries to less than a few hours. The problem for your oil industry workers is that they can’t do their job during a layover/escale. I was in Chad and my friend worked for Exxon. He was responsible for a 24 hour plan to evacuate people out of the country if violence broke out–which did indeed take place a few months after I visited the country (the plan must have been good since I heard no horror stories happening to foreign workers). That’s the sort of risk the personnel face in many places in Africa, and I’m afraid it is only going to get much worse in the aftermath of the Algerian massacre.

      Canada is in the toilet to be sure. Of course that your negative sentiment is likely a contrarian signal (since you have a very popular blog on the junior oil sector)! That means that the upside potential is very high.

      BTW, I agree about HYX. In a buyout, however, I would think that it would get perhaps 1/3 of NPV.

      • Mich

        Thanks for the compliment Peter!

        South Sudan did a good job by splitting from Sudan, they are a mixture of animists/Christians. So for them, there’s no risk of jihadists entering unless a full blown war with the north erupts.

        Regarding Canada in the toilet, I believe it will get worse before it gets better. If it’s hurting now, wait till Spring Breakup…I believe the upside will be very high only once we get a visible solution approved…ie a major new pipeline.

        My guess is HYX would sell for over $2 if they delineate their Niton McLoead acreage. But even then….it all depends on the market, if every one is trying to dump properties just forget it.

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    [...] Africa is not as well-developed or well-known as West African. Mich @ Beating The Index profiles a junior exploration company active in Southern Sudan. There’s the story, and then the back-and-forth in the comments [...]

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