ERHC Energy Inc (ERHE)

[oilman57]

*ERHC Valuation (from Mabenn)

Several new posters have asked for valuations of ERHC after awards.

Others and I have posted many valuation models over the past two years. I can say that over that period of time, the valuations of the informed longs seem to have converged into a reasonable range.

In determining a valuation there are several key questions:

How much oil is there?
How much is a barrel of oil worth?

Here’s my opinion.

First we have to realize that any valuation model can only predict a range. It is ridiculous to presume that with the level of information we have that we can predict a precise price.

There have been two 2D, and one 3D seismic studies done in the JDZ. Go to http://www.nigeriasaotomejda.com/ and click on “Multi-client Data”. You will notice that the Veritas 2D study and the PGS 3D study only cover blocks 1-4 and parts of blocks 5 and 6. The WesternGeco 2D study covers all 9 blocks.

"Interpretation carried out by WesternGeco has enabled the identification of fifty-six prospective structures within Blocks 1 to 9, of which seventeen were defined as prospects and thirty-nine as leads. Of particular interest to ERHC, however, is the recoverable reserve potential of Blocks 1, 2 and 4. WesternGeco identified six High Confidence prospects in these three blocks alone with estimated cumulative recoverable reserves potential of 4.5 billion barrels of oil. WesternGeco used reservoir parameters similar to those known from nearby fields in Nigeria and Equatorial Guinea. Combined recoverable reserves potential of the seventeen prospects was estimated by WesternGeco to be 14.4 billion barrels of oil. WesternGeco partitioned these reserves on a block-by-block basis for ERHC’s exclusive use in the bidding and option selection process relating to the JDZ licensing round.

There has been a great deal of discussion over the past two years regarding the above statement. Note particularly that they identified 17 prospects and 39 leads. The estimated 14.4B in RECOVERABLE reserves only relates to the 17 prospects, and does not include additional potential reserves in the other 39 leads. Also, many have concluded that the 4.5 B bbl number for for blocks 1, 2, and 4 does not imply that this is the total reserve amount for these blocks, only that there are six specific high confidence prospects that total 4.5 B bbl.

So, it has been generally accepted that 14.4B bbls is a conservative estimate of recoverable reserves in the JDZ. It could very well be significantly more!

So how much of the 14.4 B bbls will belong to ERHC? There are several methods that have been used to estimate this. The easiest is to assume that the oil is equally distributed across the JDZ.

ERHC made the following selections:

Choice 1 Interest 15% working interest in Block 6 Signature Bonus Free

Choice 2 Interest 15% working interest in Block 5 Signature Bonus Payable

Choice 3 Interest 20% working interest in Block 3 Signature Bonus Free

Choice 4 Interest 30% working interest in Block 2 Signature Bonus Free

Choice 5 Interest 25% working interest in Block 4 Signature Bonus Free

Choice 6 Interest 20% working interest in Block 9 Signature Bonus Payable

So ERHC has rights to 1.25 blocks. 1.25 blocks divided by 9 blocks equals 14% of the JDZ. 14% of 14.4 B bbls equals means that ERHC could have rights to 2B bbls of oil.

I have previously proposed a model that allocates reserves across the various blocks based on the level of signature bonus bids. This method also results in estimated ERHC reserves of about 2.2B bbls. http://f1.grp.yahoofs.com/v1/gG6SQrk0GPcjy18p7Z-ARMGjzZ2vcfMMAPzLA0V1kk1NxPoylAsqMTeZOJHDplh9Rs5pcdG....

So we can be fairly confident that ERHC will have UNPROVEN reserves of about 2 B bbls after awards, but how much is a bbl of oil worth. It is my understanding that an unproven bbl is worth between $1 and $3. Where you fall in this range depends on a number of factors like recovery costs and the quality of the oil. I would think being in deep offshore zones would put you toward the low end of the range, and having light sweet crude would move you back up the range. To be conservative, I have always assumed we would be in the $1 - $2 range. One poster on RB raised the very good point that oil companies have been using this range since oil was $30/bbl. Oil is now in the $50 range, so maybe we should consider $1.50 - $3 to be reasonable.

Many people are really excited about ERHC and its partners getting operatorships in blks 2 and 4. Many believe this will have a positive influence on ERHC’s share price. I honestly don’t think it will have that much impact, but let’s say it could provide a 10% premium.

Finally, other posters have said that the natural gas reserves in the GoG are typically worth another 50% of the oil reserves.

So, what PPS could we expect after awards::

Low end = 2B bbl x $1/bbl / 710M shares = $2.81 pps
Mid range = 2B bbl x $2/bbl / 710M shares = $5.63
Wildly optimistic = (((2B bbl x $2.5/bbl) x 1.5 for gas) x 1.1 operator premium) /710M shares = $11.6 pps

I will personally be amazed if we do not exceed $2.50 after awards, and will be ecstatic, but not totally surprised if we exceed $5. I we see $8 – I’ll be retired!!

Keep in mind that PROVEN reserves are valued at $6 - $9 per bbl. So once exploration wells are drilled and reserves can be proven, ERHC should be worth between $17 and $25/sh. The time frame for this could be 1-3 years down the road.

In addition to its rights in the JDZ, ERHC also has two 100% block selections in the Sao Tome EEZ which are signature bonus free, and two 15% selections on which signature bonuses are payable. The EEZ is estimated to have 24B bbls of recoverable reserves. We have heard statement that STP could move forward with the EEZ as early as the end of this year, and since several companies have 100% preemptive selections, we have speculated that there is no reason to execute a bidding round before allowing these companies to make their picks. The key element possibly constraining progress on the EEZ is the completion of good seismic studies. I am not certain of the current status of the seismic work in the EEZ.