ERHC Energy Inc. (ticker: ERHE) is a publicly traded American company with oil and gas assets in Sub-Saharan Africa. Over the last two years, ERHC has acquired exploration blocks in Chad and Kenya to complement its existing offshore blocks in the Joint Development Zone offshore São Tome and Principé.
In a recent update, ERHC reported preparations were still underway for Bell Geospace to acquire an airborne Full Tensor Gravity Gradiometry (FTG) survey of ERHC Energy’s Block 11A in northwestern Kenya.
OAG360 Comments:
An FTG survey has been accepted as “step one” for many exploration and production companies operating in West Africa, or other areas with expansive acreage blocks. The key is to first identify the structural mapping of prospective hydrocarbon basins. The process requires an aircraft that flies dense grid flight lines to measure small changes in gravity that are caused by minute changes in density of subsurface rocks and local geology. After receiving the results, ERHC will then gather 2D seismic data in order to estimate the locations of resource deposits and geometry of geologic structures prior to drilling.
OAG360 would like to draw readers attention to the proximity of ERHC’s Block 11A with Tullow Oil (ticker: TLW) and Africa Oil’s (ticker: AOI) recent oil discovery in Block 13T of Kenya – the Ekales-1 well. As we’ve reported in the past, Kenya sits at an interesting position at the intersection of two major rift systems – the Cretaceous Central African rift system and the Tertiary East Africa rift system. ERHC is pursuing the same kind of rift margin play that has yielded major discoveries in neighboring Uganda as well as recent large discoveries in Kenya to the east of its Block 11A. ERHC believes the proximity and in-trend relationship of the Lotikipi plain – the main surface feature of Block 11A – with the Ekales-1 and Twiga South-1 discoveries in Block 13T as well as the Etuko-1 and Ngamia-1 discoveries in Block 10BB, suggest a high prospectivity for hydrocarbons.
Source: Africa Oil, ERHC and Tullow Maps
Exploring All Possibilities
As we discussed in our previous write-up titled, ERHC Energy Flying High in Kenya; Airborne FTG Survey Commencing, the airborne gravity acquisition was expected to commence this summer. We remind readers ERHC is still in negotiations with an international operator interested in farming into the Block 11A following the letter of intent entered into in May 2013. Airborne surveys covering more than 2.95 million acres is not cheap – ERHC is likely waiting to confirm its farm-in partner and receive approval from the Kenyan government before proceeding with the survey.
ERHC reported back in August, after the share rights offering, that with the subsequent filing of the S-1 registration statement, ERHC intends to pursue other fundraising possibilities. The options include registered direct offerings to new investors and convertible notes and other debt instruments. Concurrently, ERHC is continuing to work to farm-out a portion of the company’s assets in Kenya, Chad and the São Tomé and Príncipe Exclusive Economic Zone (EEZ) to spread the risk.
Focusing on Kenya, if the Kenyan government rejects the farm-in partner, or the farm-in partners backs out of the deal, we believe ERHC could have a few other options to consider.
First, the company could explore for a different farm-in partner in Kenya, although given the long lead time on an option like this, the likelihood of a second farm-in candidate may be remote. Further, should the company successfully execute a farm-in agreement in Chad, the company may receive sufficient consideration to execute G&G programs in one or both countries.
Second, given ERHC owns acreage blocks is in one of the most active basins in East Africa and the emerging hydrocarbon province in Chad, would a third party conceivably become interested in ERHC at the corporate level? .
Third, via investment bank, ERHC could pursue other offerings to new investors, convertible notes or other debt instruments, in order to address market concerns about funding its G&G program.
Final Thoughts
ERHC is likely pursuing initiatives to fund the company’s exploration programs in many ways. In the company’s second quarter filing, it was disclosed the company has $4.6 million cash on hand. Assuming the company uses the same amount of cash each quarter, we calculate ERHC’s burn rate to be approximately $975,000 per quarter; clearly the management team of ERHC Energy must be pursuing potential funding gap solutions in order for the company to move forward with its exploration programs in Kenya and Chad.
To sum up our thoughts, we reference a paragraph in regards to ERHC’s initiatives from a recent 10-Q: “These initiatives may include any transaction or series of transactions in which one or more capital providers (existing or otherwise) commits debt capital to the Company, purchases equity of the Company (or securities of the Company convertible into equity), or alternatively funds the Company either directly or through farm-ins, farm-outs or other arrangements in which the capital provider earns an interest in oil and gas properties of the Company.
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