Empire Energy Closing In on Commercializing Australia's Next Big Shale Play

• Empire Energy has significant acreage across the Northern Territory's McArthur Basin, including the Carpentaria and West Beetaloo projects.
• Four successful wells have been drilled at the Carpentaria Project, with commercial flow rates achieved. A 25 TJ/day pilot plant is planned.
• The company has grown the Carpentaria 2C resource to 1.5 TCF. Conversion to 2P reserves could drive a significant valuation uplift.
• Well costs have been decreasing, with drilling and completion costs reduced across the four Carpentaria wells.
• Funding appears sufficient to reach a Final Investment Decision on the pilot plant, with a cash balance of ~$29 million and a debt facility in place.

Empire Energy Group Ltd (ASX: EEG) is an Australian oil and gas exploration and production company focused on unlocking the immense potential of the Northern Territory's McArthur Basin. The McArthur Basin is considered one of Australia's most prospective regions for unconventional shale gas, with the Beetaloo Sub-basin at the south of the basin representing a world-class resource.

Empire Energy has built up a substantial 29 million acre position across the McArthur Basin through targeted acquisitions. The company is now focused on advancing appraisal and development activities on two core projects within the Beetaloo: the Carpentaria Project in the Eastern Beetaloo and the West Beetaloo Project covering Western permits.

Carpentaria Project – Pathway to Commercialization

The Carpentaria Project is located on the eastern side of the Beetaloo Basin, covering 110,000 acres within Exploration Permit 187 (EP187). After an extensive drilling and testing program, the project is now positioned to advance towards commercial development.

Empire Energy has drilled 4 vertically and horizontally deviated wells at Carpentaria over 18-months. All 4 wells successfully intersected the target Velkerri and Kyalla shale formations, proving consistency across the project area. The wells also flowed commercial quantities of dry, low CO2 gas. The results support the company’s view that the Velkerri B shale at Carpentaria is analogous to prolific North American basins like the Marcellus and Haynesville. The B shale has ideal reservoir characteristics, including high natural fracturing and porosity. Two horizontal wells, Carpentaria 2H and 3H, achieved excellent flow rates for the Beetaloo Basin. Carpentaria 2H recorded a normalised early flow rate of 2.8 mmcf/day over 1,000m lateral length. The well produced at an average 2.4 mmcf/day over 51 days.

Carpentaria 3H flowed at even higher rates between 2.3 – 5.7 mmcf/day over 27 days. When the well was reopened after 5-months of soaking, the initial 30-day rate (IP30) increased by 30% to 3.3 mmcf/day. This demonstrates the potential to lift productivity through optimisation of completion methods and reservoir management.

According to Empire’s MD Alex Underwood, “the exceptional results illustrate the benefit of resting Carpentaria's horizontal wells before production testing.”

The 4 wells drilled to date represent early learnings, with significant scope to improve completions design and well productivity. However, the current results already appear commercially robust. Based on the success at Carpentaria, Empire Energy commissioned an independent assessment of contingent resources in EP187. Undertaken by Netherland, Sewell and Associates (NSAI), the review expanded the 2C resource to 1.5 TCF (1,739 PJ), including over 700 BCF in the Velkerri B shale.

With proof of a world-class resource now established, Empire is focused on progressing Carpentaria into its first development phase. Front End Engineering and Design (FEED) for a 25 TJ/day pilot plant is underway, with a Final Investment Decision targeted by late 2023. If approved, the US$300 million pilot plant would commence drilling production wells in 2024, with the first gas sales from Carpentaria anticipated in 2025. The plant capacity could be readily scaled over time to meet market demand.

Path to Commercial Gas Production

Empire Energy has adopted a staged approach to commercialising its Beetaloo resources. This starts with a relatively small-scale pilot plant to prove up the economics. Once viability is demonstrated, Empire can ramp up development across its expansive acreage position. The 25 TJ/day Carpentaria pilot will be crucial to de-risk early-stage development costs. Empire has managed to reduce drilling and completion costs substantially across its first four wells, giving confidence in the economic viability of the play.

For example, drilling costs per meter have declined from $5,950/m to $2,242/m between the first and third horizontal wells. Completions costs per frac stage are down from $1.33 million to $432,500. The team is rapidly advancing its understanding of the optimal technical parameters for the Velkerri B shale.

According to Chairman Peter Cleary, “The well costs achieved at Carpentaria 3H demonstrate the improvements that come with experience in appraisal, and provide a strong foundation for Empire’s first Beetaloo development.”

Ongoing reductions in development costs will be key to supporting positive investment decisions on subsequent expansions. However, the early well results de-risk the economics of the pilot plant. Corporate Connect analysis indicates the plant could generate operating earnings of $40-45 million per year at conservative gas price and cost assumptions. This provides ample justification to approve FID by late 2023 and commence plant construction.

Empire Energy is also exploring innovative partnerships, such as a recently signed Memorandum of Understanding with the Australian Pipeline Trust (APA Group). This aims to integrate Carpentaria production into APA’s existing Northern Territory pipeline infrastructure. The deal could reduce capital requirements for Empire through a built-own-operate-transfer model.

In addition to gas monetization, Empire is progressing plans with Darwin Clean Fuels to potentially supply LPG from Carpentaria to local industry. The LPG would be extracted during gas processing and used as a lower-emissions energy source. This highlights the strategic merit of Empire’s acreage position, with the ability to supply gas and LPG into Darwin and tap into export infrastructure. As development progresses, an LNG project utilising Carpentaria gas also remains a future possibility.

Funding Pathway

Empire Energy appears to have funding pathways available to advance the Carpentaria pilot plant upon a positive FID.

The company had a cash balance of approximately $29 million as of October 2022, following receipt of a $15.5 million R&D tax incentive from the Australian Federal Government. Empire anticipates an additional $13 million R&D rebate in FY2023, reflecting ongoing qualifying expenditure. The company also has a debt facility provided by Macquarie Bank, which offers additional funding flexibility. However, with a robust cash position and expectations for further R&D rebates, equity dilution to fund the pilot plant may be limited.

Empire also has options to sell its producing assets in the USA and potentially farm down an interest in the Beetaloo permits. Either could generate cash to support remaining capital requirements in 2024-25. As development gathers momentum, Empire has multiple avenues to provide required funding, minimising risk for current shareholders. The staged nature of development provides crucial flexibility in Empire’s funding strategy.

Value Uplift Potential

The clear pathway Empire Energy has mapped out for the Carpentaria pilot provides a solid platform to create substantial shareholder value. The company’s market capitalization of approximately $100 million significantly undervalues this world-class gas play. As the pilot plant progresses into FEED and FID stages over the coming months, Empire’s share price should begin closing the disconnect with project fundamentals. Near-term share price catalysts include:

• Final Investment Decision on Carpentaria pilot plant
• Conversion of Contingent Resources to Reserves
• Further drilling results showing optimized completions
• Gas sales agreements for Carpentaria gas

The conversion of Contingent Resources to Reserves with the FID approval could drive the largest uplift in fundamental value. Empire’s 2C resource across the Carpentaria Project stands at 1.5 TCF (1,739 PJ). Around 50% of this is contained within the core Velkerri B shale, at approximately 730 BCF. Converting 50% of the Velkerri B 2C to 2P Reserves would establish a maiden 365 BCF of proven commercial reserves for Empire Energy. Even at a conservative $0.90/mcf valuation, this would equate to over $300 million of fundamental asset value.

Compared to Empire’s current enterprise value of ~$100 million, this illustrates the potential quantum of value realization as Carpentaria advances into development and its massive gas resources gain reserve status.

Regional Activity Supports Commercialization

The wider fundamental drivers for Northern Territory shale gas also provide a highly supportive backdrop for Empire to commercialise its Beetaloo resources over the coming years. Natural gas is an essential source of energy for the Territory, used widely for power generation, mining and industrial activities. The Ichthys LNG project, located in Darwin, also exports significant quantities of gas.

However, the Northern Territory faces a looming gas supply shortfall as legacy fields that have supplied the Darwin LNG plant begin to decline. Production from ENI’s off-shore Blacktip field is already reducing ahead of schedule. Beetaloo Basin gas will be crucial to filling this emerging supply gap and fuelling the next phase of economic growth across Northern Australia. The NT Government is strongly supportive of accelerating the development of the Beetaloo as an urgent priority. Empire Energy is positioned at the forefront to supply this next wave of gas demand, given its advanced appraisal activities at Carpentaria. initial production from the pilot plant can readily be directed to NT gas users in need of supply.

As the first mover in the Beetaloo, Empire also has a strategic advantage over other exploration companies in the basin. Empire’s learnings can be leveraged to reduce costs as the company expands production across its permits. Ultimately, the immense scale of the Beetaloo resource could support the establishment of a new LNG export project in Darwin. This would further boost demand for Empire’s gas in the longer term as global LNG markets tighten. The outlook for Australian East Coast gas also presents a compelling backdrop for Empire to commercialise its Beetaloo reserves. The large supply shortfall emerging in southern states provides an additional potential market for Northern Territory shale gas.

External Interest in Beetaloo Heating Up

Finally, the world-class potential of the Beetaloo Basin is starting to attract increasing external interest. As other regions face supply constraints, the Beetaloo is recognised as one of the last major undeveloped conventional gas provinces globally.

This is highlighted by supermajor ExxonMobil’s entry into the Beetaloo through a farm-in agreement with Empire’s neighbour Origin Energy. ExxonMobil plans to drill multiple horizontal wells in 2023 to appraise Origin’s hundreds of thousands of acres across the basin. Majors like Exxon regularly undertake extensive global evaluations of resource opportunities. Exxon’s preparedness to commit material investment to Beetaloo appraisal reflects independent validation of the basin’s world-scale potential.

As further successful appraisal occurs, Corporate Connect expects corporate interest in the Beetaloo will continue rising. The recent takeover of West Virginia-focused shale developer Pioneer Natural Resources by ExxonMobil signals the appetite of integrated energy majors to expand upstream gas positions. Deep-pocketed companies like ExxonMobil, along with Asian energy giants, can readily afford to acquire Beetaloo acreage from smaller developers like Empire Energy to accelerate commercial production. This potential for corporate activity further highlights the enormous upside in Empire Energy’s share price as the Beetaloo advances towards full-scale commercialisation.

Investment View

Empire Energy provides investors with a compelling leveraged play on the world-class shale gas opportunity in Australia’s Northern Territory. The company has systematically de-risked its East Beetaloo acreage at Carpentaria and can now move towards commercial development.

The Carpentaria pilot plant is set to be approved in the coming months and would generate strong cashflows even at conservative well cost and gas price assumptions. Moving into development would allow the conversion of Empire’s 1.5 TCF Contingent Resource to Reserves, likely catalysing a substantial valuation uplift. Macro conditions are also aligning favourably, with urgent gas supply requirements in the Northern Territory and eastern Australia likely to drive strong demand for Beetaloo gas. Increasing external interest is validating the global significance of the Beetaloo play.

For investors, Empire Energy offers exceptional leverage to success in Australia’s most exciting emerging hydrocarbon province. The company’s current share price fails to recognise both the tremendous progress made to date and the huge potential upside as the Beetaloo transitions to field development.