Morgans has reiterated its “Speculative Buy” rating on Empire Energy Group Ltd (ASX:EEG, OTC:EEGUF) as the company transitions to pilot production and subsequently full-scale development at its Carpentaria Gas Project in the Beetaloo Basin in the Northern Territory.
EEG is advancing its plans to drill, frac, test and connect the Carpentaria-5H well in the second half of 2024, with potential for first gas sales in the first half of 2025.
Morgans has maintained its Speculative Buy rating on EEG with a revised target price of A$0.76 (previously A$1.11). The change to the target price reflects a shift to a sum-of-the-parts (SOTP) discounted cash flow (DCF) and in situ valuation from a multiple valuation.
While the share price target has been adjusted lower, it still represents a more than 310% upside on the current share price of 18.5 cents (at time of the report’s release).
The broker has also provided earnings estimates for EEG for the first time.
Morgans says that successful pilot phase production could significantly re-rate EEG, with substantial further upside risk also on offer from the larger development of its extensive 3 million net effective acres in the Beetaloo Basin.
Carpentaria Pilot Project moving ahead
EEG recently completed a capital raising, equipping the company with the funds needed to achieve first sales gas production, which is targeted for the first half of calendar year 2025.
The company’s bolstered cash reserves will also allow for the construction of essential midstream facilities and a gas gathering network.
EEG is now transitioning to pilot production and subsequently full-scale development at its Carpentaria Gas Project following successful appraisal drilling and high-flow rates from Carpentaria-2H and Carpentaria-3H wells.
The pilot program is focused on the drilling, fracture stimulation, and production testing of the Carpentaria-5H (C-5H) well. This will be the longest horizontal shale well (3,000 metres) and the largest frac job (60 stages) executed in Australia.
Given the scale of the horizontal section and size of the fracs, the C-5H will be important for EEG as it continues to work on developing type curves for the Velkerri B and Velkerri C shale pay zones.
If the C-5H well is successful and produces comparable results to Carpentaria-2H and Carpentaria-3H, EEG will be in a position to start selling gas from the three horizontal wells into the existing McArthur River Gas Pipeline, which has capacity of up to 25TJ/d for the pilot phase.
Importantly, the connection is already installed in the pipeline to allow EEG access for gas sales.
Morgans notes that longer term there is also potential for a larger-scale development of EEG’s Beetaloo interests. Its production scenario model only assumes a portion of EEG’s current resource is ultimately produced.
This could take the form of feeding existing LNG operations that sit in close proximity in NT, with the Beetaloo offering scale but also low CO2 emissions (
Potential price catalysts
Morgans outlined a number of potential price catalysts, saying that they expect 2024 to be a news-heavy year for EEG as it aims to:
Risks
However, the investment isn’t without risks and given that the Beetaloo Basin is a new gas frontier, and EEG is an early-stage aspiring gas producer, Morgans has a speculative risk profile for EEG.
Key risks highlighted include necessary approvals, drilling and operational risks, and project execution risks to budget and timelines.
Its expectations around development and production are likely to evolve as EEG advances the Carpentaria project towards commercialisation.