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.
November 13, 2013 marks a significant day for ERHC shareholders as the company announced the conclusion of a Kenyan farm-out agreement with an integrated oil and gas company. The agreement is subject to government approval, but upon completion, ERHC will transfer a portion of its interests in Block 11A as well as operatorship to the farm-out partner. The company said the farm-out includes a carry and other considerations.
Until the government officially approves the agreement, details about the partner and terms are confidential. However, ERHC President and CEO Peter Ntephe did describe the company as “technically and financially capable” in the news release meaning it is likely the operator is a company already involved in sub-Saharan Africa oil plays.
In the write-up, ERHC Energy Exploring in the Right Neighborhood; Adjacent to Recent Ekales-1 Well Discovery, we draw 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. The partner will remain unknown until the Kenyan government approves the agreement but Africa Oil and Tullow Oil make likely candidates as the farm-out partner.
If the Kenyan government rejects the farm-in partner, or the farm-in partners backs out of the deal, we believe ERHC could pursue other initiatives to fund its exploration programs.
Quoted from ERHC’s 10-Q last quarter: “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.
That said, 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.
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.
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