Value Microcaps Motherboard

[Bobwins]

I bought some more EGY today. EGY is cheap and is due to subtantially increase production. They have one main field with about 5500bpd net to them from a gross total of 20,000bpd. They are due to drill one exploratory well starting 4/27/05. After that they will drill a development well in their established etame field. etame 6-h will be a horizontal well and has been described as the best spot in the field according to the seismics. They expect it to add 4-6000bpd to the field. It may reduce the production of the other 5 wells but total gross production is expected to rise to around 23Kbpd for the field.

EGY has previously drilled exploratory wells successfully at Avouma and Ebouri. They will develop the Avouma site first by drilling a second well to complement the initial well that produced 6600bpd in a test. Since these are offshore locations, EGY and its partners need to build offshore platforms. That will extend the time necessary to get Avouma fully producing. The two well field isn't supposed to flow until 2006.

They have done extensive 3D seismics on Ebouri and the area around it. They plan to review the seismics and decide how to best exploit Ebouri. Ebouri is likely to be a two well field also and tested at 5000bpd in the first well.

Based on the test wells and EGY's demonstrated excellence at drilling, I expect production to double by late 2006 due to the development of Ebouri, Avouma and adding etame 6-h. Etame 6-h is probably the last well for the etame field so EGY needs to find new prospects after etame 6-h is done.

EGY has identified several exploratory prospects in the concession. The lack of another production area is one of the reasons EGY is so cheap. Another reason for the cheap price was their majority owner, 1818LP Fund. This fund financed the exploration of the etame field. They owned about 36million shares and wanted to liquidate their position. The shares were recently placed in a private placement and I expected the EGY share to improve but it has continued to slide. EGY hasn't drilled due to lack of a drilling rig for several months and that probably contributed to the weakness.

Overall I am impressed with the EGY mgmt. Bob Gerry is CEO and very honest and straightforward. They have demonstrated great technical skills and conservative financial mgmt.

The company has cashflow to finance their upcoming drilling program. The offshore platforms are going to cost many millions but EGY should be able to handle it without debt or issuing stock.

There is two other complications with EGY. They have a production sharing agreement(PSA) with GABON that calls for EGY to get reimbursed for the their drilling expenses. Once they get fully reimbursed, the agreement calls for higher royalties due to GABON. The company got fully reimbursed late in q4. They will move in and out of the higher taxes in 2005 as their drilling program expenses help them but their high production also reimburses them fairly quickly.

The final complication is a less favorable pricing policy for their oil. They accepted the best bid from Shell but will make about $3 less than previously. The company explained that they took this formula because it is based on the same formula as the oil produced onshore Gabon. Gerry felt that Gabon would pressure the oil company to keep this price as high as possible. Also this formula is changed qtrly so there is a chance that the $3 differential will shrink as time goes forward. The differential is caused by the Saudi overproduction of Saudi heavy sour crude. Refineries are bidding much less than they historically have for anything less than light sweet. The Saudis overwhelmed refinery capacity for sour crude when they attempted to compensate for the rising price of crude in winter 2004.

There is significant good drilling news coming for EGY this year. They should earn .40-.60eps, depending somewhat on how their drilling program works and how soon they hook up the Avouma field. Etame 6-h should be successful and should be hooked up by late q3 2005. I recommend EGY. Bobwins