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Emperor Oil: A Junior On The Cusp Of Strong Production Growth In East Africa

|About: Emperor Oil Ltd. (CHVFF), Includes: AOIFF

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 (OTCPK:AOIFF) is one such junior running from $2 to $11 last year after making a huge discovery.

Emperor Oil (OTC:CHVFF) 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 initially flow up to 10K bopd based on equivalent wells in Southern Sudan. Production would 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".

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.