(Dan Keeney): Good morning and thank you for joining us for the ERHC 2011 Year-end 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:
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David Bovell, ERHC’s vice president in charge of corporate development.
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Dr. Ken Seymour, ERHC’s senior petroleum engineer and technical adviser
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Mike Shafie, ERHC’s senior geoscientist and technical adviser.
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And Reginald Sewell, ERHC’s legal counsel who practices with Warner & Associates.
Let’s begin by reviewing the year-end financial highlights released this week…
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As of September 30th, 2011, which is the end of ERHC’s fiscal year, the Company had cash and cash equivalents and treasury bills totaling about $12,144,597.
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Management believes that these cash assets are sufficient to keep the company going for more than 12 months.
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During the 2011 fiscal year, ERHC's general and administrative expenses totaled $4,414,630, which represented a 14% decrease compared to fiscal 2010. The decrease was primarily due to ongoing cost control measures.
2011 in Review and 2012 Strategy
2011 was another landmark year in the remarkable growth of ERHC. During the year we more than doubled the company’s portfolio of exploration acreage with the addition of the Chad assets. We also took ERHC beyond the Gulf of Guinea and onshore Africa for the first time since the Company entered the E&P business. These achievements will serve as the template for our strategy going forward into 2012.
There are two main portfolio models for early-stage exploration companies like us. The first is to be a single-asset company focusing on a highly prospective asset upon which the company’s value entirely depends. The second model is to be a multi-asset player with risk spread and value balanced over several assets. While the rare E&P company might build exceptional value on the single asset model, the conventional trajectory of growth is to proceed from the first to the second model as quickly as circumstances permit.
Up until 2011, ERHC was clearly situated within the single-asset model. This was historically warranted. Prior to drilling in Blocks 2, 3 and 4, ERHC’s JDZ assets were regarded as so highly prospective that only assets of similar exceptional prospectivity could be added without diluting the attractiveness of both the JDZ and perceptions of the company. The risk of course with the single-asset E&P model is that the drilling must prove up the asset to be as good as was expected prior to drilling. Otherwise the company’s valuation might suffer seriously. There are limited margins in the model for anything other than spectacular drilling results.
In our case, if the initial drilling campaign had resulted in the kind of commercial oil discoveries that all pre-drill expectations had pointed to, then persistence with the single-asset model might have been justified. Indeed, the kind of value enhancement that might have resulted in that event would have also afforded us the leverage to easily diversify. We continue to have high expectations for eventual commercial discoveries in the JDZ but without those expectations being immediately borne out, our business model has had to be quickly and actively adjusted to the reality of the initial drilling outcomes in our JDZ Blocks.
Long recognizing the risk with the single-asset model, of putting all your eggs in one basket, we outlined over two years ago, a strategy to grow the company’s portfolio beyond the Gulf of Guinea. Yet acquiring assets of similar promise as the JDZ were hindered by the Company’s well-known external challenges at the time. With those challenges behind us, in part due to the hard work management has put into reclaiming industry credibility for ERHC, and with the greater receptivity therefore of our unyielding business development efforts, we were finally able to commence the transition from single-asset to a multi-asset player starting with the Chad assets in 2011.
In 2012, we intend to intensify the transition. Our business development strategy will concentrate on:
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Direct awards of exploration acreage from government in Africa
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Onshore exploration acreages
Awards from government offer low-cost entry compared to commercial farm-ins. Although they are usually faster to actualize, commercial farm-ins often involve a higher premium than is currently feasible for ERHC. With regard to the situation of new blocks we shall seek, they will be mainly onshore even if we will not rule out consideration of any highly prospective offshore blocks that might become available to us. The reason for the onshore focus is the cheaper cost and infinitely easier technological and logistic requirements for operating onshore. The strategy is not futuristic; it is already being implemented. We are currently in negotiation with at least three African countries where onshore rights have been reserved in principle pending agreement on proposed work programs and other key terms upon which license awards will be predicated. If and when we reach definitive agreement on these or other rights, ERHC will make the requisite announcements.
Crucial to the success of our business growth and our ability to convince governments to award new acreages to us is the ongoing development of our disclosed technical abilities. While we continued to have access to world-class technical services on a just-in-time, outsourced basis in 2011, we also built up our retained technical team to levels never seen before in ERHC. The highly qualified and experienced Dr Ken Seymour, Michael Shafie and Dr. Peter Thuo joined our technical team in 2011. We consider the fact that these highly skilled professionals have chosen to join the ERHC family to be a strong endorsement of our strategy and focus.
The fortification of our technical ‘face’ and our new onshore focus represent critical first steps towards ERHC eventually becoming a recognized operator in its own right. We expect to take more important steps in that direction in 2012.
Financing ERHC’s Growth
As an early stage E&P company, the options open to us to fund our growth rest mainly in new equity issuances and monetization of our acquired assets. Access to debt finance is usually limited except in the case of producing or near-producing assets. Our current market valuation also constrains the immediate likelihood of any significant fund raise by equity issuance.
Monetization of part of the JDZ assets has been the main source of cash for ERHC since 2006. ERHC swapped a portion of its rights in the JDZ for cash and a carry of costs. We have never wavered from our intention to replicate this model. We have valuable interests in both Chad and the EEZ. Our intention is to monetize a portion of these assets in 2012. To that end, we have been working to attract technically and financially capable partners to farm into our Blocks in both the EEZ and Chad. I shall return to that in a moment.
AIM Listing
One of the major reasons for seeking an AIM listing has been to increase access to equity finance by a probable boost in market valuation following migration to a credible international exchange with less volatility than penny stock platforms and a demonstrated affinity for African E&P assets. Currently, ERHC is addressing the issues that were raised by AIM due diligence during the past year to make the company’s application for listing more likely to succeed. During the period that these issues are being addressed, partly out of the necessity to be cost efficient, there will be no retention of a Nominated Advisor.
The major issues being addressed fall into two categories:
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The status of requests for information issued by U.S. Government agencies to ERHC four to five years ago. Following discussions with at least one of the Government agencies and with our advisers, our disclosures regarding those requests have been substantially revised, as shareholders might have noticed, in the current 10-K.
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More publicly available, authoritative information on the business activities of significant affiliated entities. We have limited capacity to influence this aspect since it relates to entities over whom we have no control and which are not obliged by their corporate structures to seek any more publicity than they currently do. However, given that our affiliates stand to benefit from value appreciation of ERHC, we have secured the affiliates’ commitment to more publicity of business activities and this has already started to become evident in international media.
We shall revisit the listing on an international exchange at the end of the first quarter of next year or so soon thereafter as the steps above are deemed to be sufficient to make a successful listing application possible.
Now for specific updates on our portfolio:
Republic of Chad
Early in the summer of 2011, ERHC signed a PSC with the Government of Chad for three oil and gas Blocks: 100 percent of the BDS 2008 and Manga Blocks and 50 percent of the Chari-Ouest 3 Block. Both BDS 2008 and Chari-Ouest 3 are situated adjacent to the prolific Doba and Doseo Basin oil fields which had an average daily production of over 122,500 barrels of crude oil in 2010. The Manga Block is north of the Lake Chad basin.
During our last investor conference call, we stated that our exploration work on the Chad assets will initially cover three categories of activities:
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Database generation (three to six months)
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Data collection and processing (three to twenty four months) and
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Consequential geological and geophysical work (initially six to thirty six months or more).
The nature of exploration activity means that these activities are not mutually exclusive but will continue to be repeated as work progresses and more information is acquired on the Blocks. Initial database generation, using the technical data made available by the Chadians, has been completed. This data base has been constituted into a virtual data room which is currently being visited under terms of confidentiality by several interested, prospective farm-in partners. Among the more active visitors so far have been some very big international E&P players. The discussions on possible partnerships have been without prejudice to ERHC’s preparations for commencement of the work program on the PSC.
Currently, we are working with the Chadian authorities on the requisite management arrangements, our proposed timetables and the preliminary approvals for the work to be done in the first period of the exploration program. The award of an Exclusive Exploration Authorization (EEA), as provided for by the PSC, is a major event expected to occur as a matter of course within the first half of 2012 to trigger the clock on ERHC’s work commitments on the PSC. The initial exploration term under the EEA will be for five years commencing from the date of publication of the EEA in the Journal Officiel, an official journal publication of the Chadian Government. The exploration term is renewable for a further three years.
For purposes of contractual obligation and expression, we have taken the conventional route of stretching out our minimum work commitments over the eight years permitted. It will not be unusual however, particularly given the prospectivity of the Doba and Doseo basins, that our G&G studies produce such results as cause us to commence drilling activity much earlier than has been proposed. This is what our technical team will work towards. 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.
São Tomé and Príncipe EEZ
In November, we commenced negotiations with the Government of São Tomé and Príncipe on PSCs for Blocks 4 and 11 of the Exclusive Economic Zone. Negotiations have been professional and determined but cordial. It is expected that they will take several rounds to complete. We will reconvene in São Tomé in February for another face-to-face round but negotiations are actively continuing in the interim via correspondence and telecommunication.
Simultaneously with the negotiations, we are talking with prospective partners for the EEZ Blocks. Our announced goal has always been to replicate the farm-in cash payment and carry arrangements of the JDZ as much as is possible allowing for the different nuances of the EEZ. We have elicited interest from several, credible deepwater operators. These operators are, at our instance, currently visiting the data room established jointly by the National Petroleum Agency of São Tomé and Príncipe and Petroleum Geo-Services (PGS) as a repository for the existing seismic and related technical data on the EEZ.
Our EEZ Blocks show significant similarities with adjacent Blocks offshore Gabon which host numerous discoveries and have seen a flurry of activity in 2011 including the entry of Brazilian E&P giant, Petrobras into the Ntsina and Mbeli Marin Offshore permits.
Joint Development Zone
The first exploration phase in our JDZ Blocks 2, 3 and 4 ends in March 2012. During the next two months, the contracting parties will be meeting to take decisions regarding the next steps in the Blocks. Those decisions will be based on the extensive technical analysis that has been conducted on the back of the 5-well drilling campaign concluded last year. The recent studies have covered the relationship between fault characteristics and hydrocarbon accumulation in the JDZ as well as hydrocarbon accumulation modeling and optimization of favorable exploration targets. As we have previously described, there are more than a dozen undrilled prospects in our JDZ Blocks. The essence of the analysis has been, in part, to use the information obtained from the drilling to identify any undrilled prospects which might be likely to yield commercial hydrocarbons.
One event that will be potentially fundamental in the JDZ is of course the impending drilling by TOTAL in Block 1. Earlier this month, TOTAL’s intention to spend approximately $200 million on an ambitious drilling program was widely reported. According to the reports, TOTAL intends to drill two wells in Block 1 using the Pacific Scirocco deepwater drillship which is already in the vicinity. We do not have any rights in JDZ Block 1 but success by TOTAL in its campaign promises to positively impact on the JDZ as whole and on ERHC’s Blocks.
Exile Resources
During the year, we invested in Exile Resources, a Toronto-listed junior with interesting assets in Africa, particularly the proven Akepo field in the prolific Niger Delta. Our ultimate objective for the Exile investment was two-fold. We wanted to obtain such control of Exile as would enable us to gain access to the production in the Akepo field and also to constitute Exile into a wholly owned listed subsidiary of ERHC available for fund-raising purposes or even a reverse takeover. It is important to emphasize that this was not a speculative equity play carried out purely for the ability to shortly thereafter liquidate the investment for profit. Rather, it was an investment based on the underlying value and subjective strategic utility of Exile to companies like us, such factors not being captured - in our view - by the market’s undervaluation.
As our shareholders will now be aware, Oando Exploration and Production, Exile’s partner in the Akepo field, discerned the same potential strategic benefit as we did in Exile and managed to preempt us. In July, Oando and Exile announced a proposed transaction whereby Exile would acquire certain interests of Oando and pay for the acquisition with Exile stock in what effectively would be a reverse takeover by Oando. Subsequently, Oando and Exile’s management reached a definitive agreement that is now only subject to Exile shareholder approval before it is fully implemented.
ERHC currently holds a 7.35 percent stake in Exile which makes it one of the largest single shareholders in the company. If the deal with Oando is approved, ERHC’s proportionate control of the company will be vastly reduced as its stake would then be less than half of one percent. However, looking at the quantum and quality of assets that Exile proposes to acquire from Oando and the cachet that might accrue to the combined entity, it is possible that the monetary value of ERHC’s holding might appreciate considerably. In that event, the ability would arise to leverage the holding for gain, perhaps by swapping it for a direct stake in any of the assets of Exile or by way of swaps elsewhere.
ERHC plans to attend a meeting of the shareholders of Exile on December 29th where the Exile/Oando transaction will be considered. We will inform our shareholders thereafter of any discernible consequences of the meeting on ERHC’s Exile investment.
ERHC’s Annual General Meeting
An Annual General Meeting of the shareholders of ERHC is proposed for April 24, 2012. In the coming weeks, this date will be firmed up and the appropriate notices and regulatory steps will issue. A record date will be announced, in accordance with law, for the purposes of determining the current body of shareholders entitled to attend and vote at the meeting. All shareholders of record as of that date will be formally notified of the date, time, venue and business of the meeting as well as of such other matters mandated by law. We look forward to seeing as many of our shareholders as possible at the meeting.
Conclusion
In conclusion, 2011 has been another landmark year in the remarkable history of ERHC. We added interests in Chad that not only diversified our portfolio of oil and gas assets but also more than doubled the size of that portfolio and jumpstarted ERHC’s evolution into a multi-asset company with both offshore and onshore interests. We are continuing efforts to secure additional assets to complement our existing, high quality portfolio and have made strides toward exploration in the EEZ. We have also deepened our technical capabilities while reducing costs. ERHC continues to grow from strength to strength and the management thanks all our shareholders without whose involvement, support and trust none of this would be possible.
Thank you for taking time out to participate in our call today.
I’ll now turn the call back over to the operator and Dan Keeney for questions.