(Dan Keeney)
Good morning, and thank you for joining us for the ERHC Third Quarter 2011 Conference Call.
Statements during this conference call may concern ERHC Energy Inc.’s future operating milestones, future drilling operations, the planned exploration and appraisal program, future prospects, future investment opportunities and financing plans, future shareholders’ meetings as well as other matters that are not historical facts or information. Such statements are inherently subject to a variety of risks, assumptions and uncertainties that could cause actual results to differ materially from those anticipated, projected, expressed or implied. A discussion of the risk factors that could impact these areas and the Company’s overall business and financial performance can be found in the Company’s reports and other filings with the Securities and Exchange Commission. These factors include, among others, those relating to the Company’s ability to exploit its commercial interests in Chad, the JDZ and the exclusive economic zone of São Tomé and Príncipe, general economic and business conditions, changes in foreign and domestic oil and gas exploration and production activity, competition, changes in foreign, political, social and economic conditions, regulatory initiatives and compliance with governmental regulations and various other matters, many of which are beyond the Company’s control. Given these concerns, investors and analysts should not place undue reliance on these statements. Each of the above statements speaks only as of the date of this conference call. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any of the above statements is based.
For additional information on ERHC, please visit our Web site at www.erhc.com.
I am now pleased to turn the call over to Mr. Peter Ntephe, Chief Executive Officer of ERHC Energy….
(Peter Ntephe)
Good morning! I appreciate you taking time out of your busy day for this update on ERHC’s operations and the Company’s financial position. With me and Mr. Keeney on the call are:
- David Bovell, ERHC’s vice president in charge of corporate development.
- Sylvan Odobulu, ERHC’s controller in charge of financial matters.
- Dr. Ken Seymour, ERHC’s senior petroleum engineer and technical adviser
- Mike Shafie, ERHC’s senior geoscientist and technical adviser.
- And Reginald Sewell, ERHC’s legal counsel who practices with Warner & Associates.
Let’s begin by reviewing the financial highlights from the Third Quarter released this week…
- As of June 30th, 2011, ERHC had cash and cash equivalents totaling about $14,816,976.00 million.
- Management believes that these cash assets are sufficient to keep the company going for several years.
- During the third quarter, ERHC's general and administrative expenses totaled $887,421.00 million, which represented a 38% decrease compared to the third quarter of 2010. The decrease was primarily due to the Company’s cost control measures.
As described in our previous conference call in May, management is currently pursuing five major initiatives.
- First, we are growing the Company by the addition of new assets.
- Second, in order to finance the growth of the Company, we are pursuing strategic alliances and fund raising activities.
- Third, we are seeking a listing on the Alternative Investments Market of the London Stock Exchange, also known as AIM.
- Fourth, we are in talks over Production Sharing Contracts on the Company’s blocks in the São Tomé and Príncipe Exclusive Economic Zone (“EEZ”) as well as seeking technical partners to farm into our EEZ Blocks.
- Fifth, we are continuing our participation in the exploration program in our Blocks in the Nigeria - São Tomé and Príncipe Joint Development Zone.
We will address the status of each of these initiatives in some detail and then open the call to your questions.
Growth Strategy
The last quarter was a landmark one for ERHC in terms of business development. With the successful acquisition, during the quarter, of three Blocks in Chad, one of Africa’s most exciting new areas for oil and gas exploration and production, ERHC’s asset portfolio not only more than doubled but became even more exciting and much more prospective. We will have more information on this in a moment.
Chad occupies the center of what is a “golden triangle” of oil production in Africa . It is ringed on three sides by Africa’s largest producers in Nigeria, Libya and Sudan which together have nearly 100 billion barrels in proven oil reserves. Chad itself is a prolific producer country with over a billion barrels of proven oil reserves and has seen considerable international competition among independents recently for acreages. ERHC’s successful demonstration of its pedigree in African oil and gas exploration led to the award of the Blocks, despite the competition. The accomplishment is yet another landmark in this Company’s remarkable history of achievement but we believe it to be just the beginning.
Let me take time out here to explain the nature of our assets in Chad. They are exploration blocks which means we will be looking for or “exploring’ for oil and gas in them. How does one go about exploring for oil and gas in exploration blocks? First of all, you do geological and geophysical (“G&G”) studies, including seismic work, to determine the areas where oil and gas might have accumulated in your blocks. This G&G enables the pinpointing of targets for drilling. By the time targets for drilling are pinpointed, you are usually able to make a reserve report, which is a scientific “guesstimate” of what amount of oil and gas might be in the ground. It is important to emphasize “might” because there is still no way of knowing for sure whether there is oil and gas, and if so, how much, until the exploration well is actually drilled. Please notice I have spoken in general terms because this applies to exploration blocks generally and not just to ERHC or ERHC’s blocks in Chad.
The requests therefore from some of our shareholders for production figures and revenue estimates on our Chad assets is premature as we still quite some time away from when that kind of information will be possible.
If these are exploration blocks, then why are we so excited about them and why have they generated all this interest from the industry and in the media? We are very enthusiastic about our Chad exploration acreages because not only is the existing geological information (upon which our choices were made) very encouraging but also the acreages are in the midst of sizeable oil and gas discoveries, including producing fields run by a plethora of American majors and Asian oil giants who have invested billions of dollars in Chad.
Our BDS 2008 virtually surrounds the Bongor West block where Conoco has had numerous oil and gas discoveries and is bordered to the south by Chari East-Doseo block where ExxonMobil (“Esso”) and Conoco have had numerous discoveries. Our 50 percent portion of Chari Ouest 3 is adjacent to OPIC’s recent discovery at the Benoy 1 well and the block is directly north of the massive Doba Basin oil field, which in 2010 had an average daily production of 122,500 barrels of crude oil per day. The $4 billion Chad-Cameroun pipeline which is the export route for oil dissects this area as does the pipeline to the new Ndjamena refinery at Djamarya. In other words, ERHC has acquired blocks in the most prospective hydrocarbon region of Chad as well as the most prolific in terms of production.
The Manga block is north of Lake Chad, along the Border of Niger and is intersected by the Borkou-Ennedi Sub-basin. While the exploration and production activity in Chad has not been as prolific in this area as it has been in the South, the geology is quite promising and it is reasonably near the Lake Chad basin which has seen a lot of exploration work on the Chadian and Nigerian sides.
Let me talk a bit more about our blocks specifically and what informed our choices. Chari Ouest 3 is immediately north of the Exxon Mobil block, Chari West-Doba, which is producing from three fields – Kome, Miandoum and Bolobo – as well as the Nya-Moundoul discovery. The block is located on the basinal margin where the play chance is maximal. The block is situated along the northwest trending half-graben features of the Doba basin where oil and gas are trapped. Furthermore, the block is situated on the prolific, oil producing Central African Rift System. Rift systems are recognized to create oil-bearing, sedimentary basins all over the world. The Doba basin is also enhanced with the northeast striking Central African Shear Zone, a tectonic element known for influencing petroleum migration and trapping.
ERHC’s BDS 2008 Block lies immediately north of ExxonMobil’s Chari-East Doseo block which has four discovery wells (Kibeo-1, Tega-1, Maku-1 and North Sako-1) drilled along the common border of the blocks. The block is situated on the Central African Rift and Central African Shear Zone, a prime location for petroleum reservoirs to exist. ExxonMobil identified over thirty drillable prospects, each with more than 10 million barrels of oil equivalent along the common border of the blocks.
Our Manga Block lies about 300 km north of ExxonMobil’s LAC Chad block on the Lake Chad basin where two oil discovery wells (Sedigi-1 and Kanem-1) were drilled. High grade gravity and magnetic data reveals structural high features, a prime candidate for oil and gas trapping and accumulation. The gravity/magnetic data also depict a series of abrupt linear features, possibly near vertical faulting, to direct the hydrocarbon migration paths into the structural highs. The block possibly benefits from the existing source rocks in the Lake Chad basin.
The intensive and extensive exploration activity in Chad and particularly around our Chari Ouest 3 and BDS 2008 Blocks may be contrasted to the selective activity in the sort of deep offshore Blocks that our portfolio formerly consisted exclusively of. The Blocks in Chad are onshore which makes exploration infinitely easier, less risky and technically complicated, and often easier to finance.
Of course, there is now work to be done. We have outlined in the 10-Q filing the nature and extent of exploration activity potentially involved in our Chad exploration program, particularly with regard to G&G work. Our exploration program will simultaneously cover three categories of activities – database generation (three to six months), data collection (three to twenty four months) and G&G work studies (initially six to thirty six months or more). These three categories of work will take the exploratory process through the gathering of all technical data into a project database, acquisition of necessary software and hardware, acquisition of gravity data, satellite oil seeps and seismic data, and finally, the interpretation and analysis of the collected data toward generating drillable oil and gas prospects.
There is a minimum expenditure commitment of $5 million for the first four years of the exploration program. As is conventional however with PSCs all over the world, a specific annual work program and corresponding budget will be agreed in advance, every year, with the Chadian authorities.
Our technical team is already synthesizing the mass of technical information that we became entitled to and received from the Chadian authorities after we signed the PSC. Again, one of the exciting things about our Chad Blocks is that with the level of exploration work in the vicinity, we are not starting from scratch, from a technical perspective. Upon finishing the technical synthesis shortly, we will proceed to agree with the Chadian authorities the requisite management arrangements, our proposed timetables and the preliminary approvals for the work required to be done in the first period of the exploration program. Thereafter, we will begin the important work of contracting service companies that will start carrying out the first steps of the G&G work. This will be done in tandem with discussions with potential partners.
We have already received many expressions of interest, most of it unsolicited, from potential partners, investors and service companies regarding our Chad Blocks. We expect a lot of exciting activity towards creating value within the Blocks in the coming months and shall keep our shareholders duly informed of the progress as it unfolds.
In addition to the remarkable achievements in Chad, we continue our aggressive efforts to grow the Company in several West African countries and in at least two East African countries. We will provide our shareholder’s with details as soon as any of these efforts results in a definitive agreement.
With the goal of further diversifying our asset portfolio, we have been involved during the last quarter in intensive work in Nigeria on producing and near producing assets. In recent weeks, there has been some media coverage of one of these initiatives - ERHC’s talks with the Imo State government of Nigeria. Imo State is one of Nigeria’s oil producing states and one of the earliest places where oil operations were established in Nigeria. Addax Petroleum, our technical partner in the JDZ, operates OML124 which is located in Imo State. OML 124 has been in production for more than 30 years and Addax achieved has achieved production in excess of 9,000 barrels of oil per day since it became the licence holder. We are very positive about our discussions, which focus on bringing marginal fields to production.
As for our interest in Exile Resources, last week Oando PLC, one of Africa’s most successful integrated energy groups which is listed both in Johannesburg and Lagos, announced what is to all intents and purposes a reverse takeover of Exile Resources. Exile Resources is a Canadian company whose assets include a 10% carried interest in Nigeria’s Akepo field which was discovered in 2003 by Chevron. Of course, as might be clear from our previous conference call and announcements, Exile has been a target for ERHC.
ERHC has accrued approximately 7.35% of Exile’s issued share capital, making ERHC one of Exile’s single largest shareholders. Over the last few weeks, we have held important discussions with Exile’s management and some of its other significant shareholders. ERHC’s acquisition of the stake in Exile was never a mere equity play. Rather, it was (as stated clearly during our last conference call) in execution of that part of our growth strategy that involves acquiring influential or controlling stakes in E&P companies which might be considered to be undervalued by the market (like ERHC) given their underlying assets. We are not surprised that Oando, among other companies who also apparently have Exile in their sights, would share our belief that Exile was not only undervalued but provided a real opportunity for the exploitation of synergies and corporate restructuring arrangements. Oando’s offer has its attractions, but from ERHC’s perspective, these are not overwhelming. We and our advisers will be examining the Oando-Exile transaction closely in the coming weeks and we may intervene as is appropriate to enhance value for our shareholders. We will of course update our shareholders should developments dictate this.
Our objective in all these growth activities is to amass a rich portfolio of assets across the exploration and production lifecycle and not only in the exploration phase as we have today. We anticipate that having a bigger and more varied portfolio will contribute positively to enhancement of value for our shareholders.
Financing ERHC’s Growth
In the last quarter, we have continued our intensive marketing of ERHC in major financial centers and among institutional investors and financiers. Our next presentation will be at the Enercom Oil and Gas Conference which takes place next week in Denver from August 14 to 18. We encourage our investors and all those interested in ERHC to attend our presentation.
Like we have kept emphasizing, debt finance is not easily available to E&P companies with exploration assets, no matter how prospective and attractive those assets are. Debt financing will become a feasible option if and when one of the proven or near-producing assets which we have in view materializes.
For our exploration acreages, what is more readily available is equity finance. We expect therefore that our work in Chad will be financed by a combination of equity fund raising and, where appropriate, farm in fees or consideration in kind (such as service provision) from suitable partners. Again, I must emphasize that there is nothing strange or unique to ERHC in all this. Our fund raising options are the conventional and tried and tested methods by which E&P companies in our position finance their assets and grow themselves for the benefit of their shareholders.
ERHC already has a successful track record of partnering with technically and financially capable operating partners, and we are currently exploring potential partnerships and collaborations on Chad. Other North American companies that have been awarded similar exploration blocks in Chad and elsewhere have successfully raised funds to apply to exploration costs, ERHC is well-placed to do the same.
AIM Status
In bidding for assets in Africa, whether directly from government or as farmouts from existing license holders, we have had to demonstrate each and every single time our ability to raise financing beyond the cash we have in the bank. The existence of our S-3 registration and the ease of our equity fund raising under the S-3 last September have been fundamental in meeting the requirement. ERHC’s need, as a dynamic and growing E&P company, for ready and continuing access to capital makes more important the need to move ERHC onto a stable, better informed and institutionally dominated market which is relatively immune from the sort of petty stock bashing that penny stock platforms like the OTC BB have proven themselves so vulnerable to.
The OTC market’s lukewarm reaction to ERHC’s Chad oil block awards is a perfect illustration of why it is so important to continue on our determined path towards an AIM listing. ERHC’s stock needs to be evaluated by a market that, on one hand, has innate, specialist understanding of the E&P business and an affinity for West African assets and on the other is not vulnerable to stock bashing and corporate defamation campaigns conducted under anonymity by a few individuals or groups whose motives are open to question.
Following the announcement of the Chad awards, we have received quite a lot of interest in our Chad involvement. Some of this interest has come from potential investors who might be put off as a matter of policy or corporate prohibition from investing in penny stock.
So what is holding up AIM? More due diligence has been required on ERHC, following the initial due diligence conducted, and we are currently responding to that request. ERHC’s history is longer and richer, and its asset portfolio bigger, than the typical applicant for an AIM listing. The various parties involved in our AIM listing efforts want to fully understand and verify some of our historical detail and ancillary circumstances. Despite taking more time than anticipated, we continue to believe that listing on an accomplished international exchange is in the best interests of the company and its shareholders and we are determined to accomplish it. We continue to work unrelentingly on the listing project and will provide updates as the due diligence progresses.
São Tomé and Príncipe EEZ
To date, we have had positive discussions with the National Petroleum Agency of São Tomé and Príncipe toward PSCs on our Blocks in the EEZ. Further talks are due toward the end of summer. I want to make sure our investors understand that the ANP-STP, on behalf of the Government of Sao Tome and Principe, is in control of the process. ERHC’s responsibility is to respond timeously and diligently to the ANP-STP’s program and that is what we are doing. The STP process is a painstaking one, this being the pioneering PSC exercise in the EEZ which is a frontier oil and gas zone albeit an exciting one. We continue to respect and support the remarkable work being done by the STP-ANP and the Government of São Tomé and Príncipe towards bringing oil and gas activity to fruition in the EEZ.
ERHC has 100 percent working interests of EEZ Blocks 4 and 11 with no signature bonus obligations attached to those interests. Our Blocks sit south of the Niger Delta, and west of the Gabon salt basin, retaining similarities with each of those prolific hydrocarbon regions.
Joint Development Zone
A big story to watch for in the JDZ in the coming months is the anticipated drilling in JDZ Block 1. While ERHC does not have interests in JDZ Block 1, our JDZ Blocks do border Block 1. More importantly, any drilling in JDZ Block 1 (as has been the case with drilling in our Blocks 2, 3 and 4) is expected to positively impact on the JDZ as a whole by providing potentially valuable information that would facilitate further exploration work on our Blocks.
The involvement of Total as the new operator of Block 1, replacing Chevron, also offers collateral advantages Zone-wide. Total is the operator of the AKPO field directly north of the JDZ and it is typical in such regions for a certain level of co-operation and information sharing between contracting parties across Blocks. Anticipation therefore builds within the ranks of parties in the other JDZ Blocks, including us, as drilling nears in Block 1.
During the quarter, we participated in further technical meetings between the contracting parties and the JDA on our JDZ Blocks 2, 3 and 4 with respect to the ongoing analysis of findings from drilling in the Blocks. While oil has not been discovered yet in our JDZ Blocks, biogenic methane gas was discovered. In addition, our Blocks are quite large – and there are more than a dozen additional prospects within the Blocks yet to be explored. The ongoing analysis includes evaluation of undrilled prospects and basin modeling to assess the likelihood of finding thermogenic hydrocarbons in those prospects. The extension of Exploration Phase 1 represents the contracting parties’ and JDA’s commitment to comprehensive analysis of the findings so far and a continuing assessment of the potential of the JDZ as a whole. That level of analysis is required, in view of the high capital requirement in deep offshore exploration, to maximize the likelihood of eventual success for the exploration program.
Conclusion
In conclusion, these are truly exciting times for ERHC. The size of the Company in terms of underlying assets has more than doubled over the last quarter and the new additions are perhaps even more exciting and prospective than the already high-quality portfolio we had. If all goes as planned, the coming months carry the potential of a steady stream of interesting and significant events as the work program commences on the Chad assets. And even with our recent successes, we are continuing to pursue yet more new prospects that will complement our existing, high quality portfolio. Are we excited at ERHC? You can bet we are!
Thank you for taking time out to participate in our call today.
Today’s question and answer session is the first for which we have specifically requested written questions in advance. We thank all those who have sent in written questions to the email address provided. We will first take a few of those questions and then answer any other questions you might have.
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