By Stewart Dalby
Most small cap oil and gas companies whether quoted on London’s AIM or elsewhere , their share prices withered by the sharp fall in oil prices, have reacted in the same way –they plans up plans dramatically to cut costs.
Empyrean Energy is in a different position to most and has reacted differently. Last July, with its share price rallying after some production success, but always pushed a bit pushed for cash, the company decided to launch a strategic review and look for a formal sale process (FSP) for the company.
After much thought and discussion and a number of approaches from interested parties. It has now decided to terminate the FSP. The decision was taken in the light of fall in oil prices and the subsequent scaling back of investment by many of the companies operating in the US.
Consequently the management felt that a sale this time would not realise value for shareholders and plans to proceed with the ongoing development of its current projects. Empyrean’s core asset is a small but significant toehold in in the liquids rich heart of the of the prolific Eagle rich Eagle Ford Shale play in Texas, one of the most prolific plays to emerge from the North American shale boom.
The AIM-quoted company has a three per cent stake in the Sugar Loaf AMI project, a 24,000 acre tract where operator Marathon Oil is driving new completion and down-spacing initiatives that are yielding the kind of ROIs that has put the project the radar of companies and investors looking to get into the shale business.
House broker Cenkos believes the decision to stay with Sugarloaf is a prudent decision, as production at Sugarloaf has been increasing as additional wells are brought on stream. Production in 1H 2014 averaged 1,104 boepd and following additional wells in both the Eagle Ford and Austin Chalk intervals reached 1,327 boepd by September 2014.
Since then Marathon has been piloting a new “stack and frac” technique that will drive recovery and optimise co-development from multiple horizons: the Austin Chalk, Upper Eagle Ford Shale and two Lower Eagle Ford Shale layers. Further well downspacing harried out.
With 184 wells in production at December, and a possible further 100 for 2015 there is scope for increased production in the coming months
Cenkos analysts believe that Sugarloaf wells are economic given the scope of the infrastructure in place, low entry costs and multiple stacked intervals, and that the AMI is located in `liquids. window’ of the Eagle Ford play. In the brokers view the development of the Eagle Ford and Austin Chalk offers transformational upside for Empyrean and at current levels offers investors cheap entry into a play directly geared to the anticipated uplift in commodity prices.
Cenkos concludes its analytical note by saying: “We reiterate our BUY recommendation and have amended our target price to 16p (from 31p). The share price last evening was 5.12p which is its 52 week low against a 12 month high of 20.37p.