Eromanga Hydrocarbons

Listed as ERH on the ASX

Official Listing Date- 1 January, 1974

Web site http://www.erohydro.com/home

Undiluted market cap =161,518,103 shares
Market cap Value of = $ 32,303,620.60 based on a .20c share price

Also trades under the following on the ASX
ERHO
The Options expire on 24/07/2009 for 0.100 (this option type also has a .20c option attached to the .10 option). The .20c option expires on the 31st of July 2012
Approximate amount of listed options = 61880420
Proceeds due from listed options
24/07/2009 = $ 3,094,021.00
31/07/2012 = $ 6,188,042.00
Total = $ 9,282,063.00

ERHCA
The partly paid option has an exercise price of .50c. .16c of the partly paid option has already been called, leaving .34c outstanding on this option. This option has no expiry date and can be called by the company at any time and for any amount of the .34c.
Total amount of partly paid options = 109,914,313
Proceeds due from listed partly paid options
Total = $ 37,370,866.42

Fully diluted market cap= 353,762,836.00 shares
Proceeds from a fully diluted market cap= $ 47,082,929.42
Based on a fully diluted market cap and proceeds from the dilution Eromanga has cash backing of .15c per share AUD

Also listed on the USA Pink sheets Code ERHYF

Current cash on hand = $ 4,983,000.00 AUD + $1,567,112.96 AUD in Brazil account (as of the 31st of December 08) Total = $6,550,112.96 AUD

Debt Long and short term = $0.00
Quarterly admin expenses =An average of $340,000.00 AUD
Total production profits =
On the 31st of December ERH announced that they had produced 5400 from Paca1 since October’s production testing started. This worked out at around 60 bopd. They made a profit from this production of $49,704.00 (this was after transport costs but before royalty and tax). Using an average oil price of $40.00 a barrel this worked out at a profit of $23.01 per barrel.

2009 cash flow

Cash on hand AUD6.5M
Option expiry 2Q2009 AUD3.0M
Less: Admin expenses 12 months AUD1.4M

Estimated cash on hand 31.12.09 AUD5.1M

Less: Drilling costs Gavea JV
330 Paca -2 (now drilling) AUD0.8M
330 Paca -3 (3Q2009) AUD0.8M
430 Loc 1 Tatu 2 (2Q2009) AUD0.8M
430 Loc 2 (end 2Q2009) AUD0.8M

Net surplus BEFORE development 330 AUD1.9M
IN TOTAL SIX WELLS will be producing approx. 2000 bbls per day. At expected annual POO average of USD50 bbl, profit per bbl equals USD20.
Total annual AUD profit equals AUD22M
ERH share at 40% equals 9M.
Earnings per share 4.7c (this is after options exercised this year – not piggy backs) or 2.5c per fully diluted.

Company Overview
Since mid 2006 the little shell company that was just drifting took a major turn with the appointments of Phil Galloway (as CEO), Mr Christian Turner (Director) and Mr John Weston (Director).
The new look management team took the company in new directions creating real projects in both in Australia and Brazil and also successfully refinancing through placements, the last placement at .47c in June last year 2008 was oversubscribed for.

Mining Project
The Current Australian project located in Edwards Creek South Australia and is planned to be drilled in the first half of 2009. Olympic Dam" type ore deposits are believed to exist in the project area.
Favourable features observed at Santorini Edwards Creek include:
· a zone of structural complexity defined in 200 m line spaced and regional magnetic survey data
· a NW structural trend, identified in magnetic data
· the War Loan Copper mine is located a couple of kilometers to the east where mineralization is hosted in quartz-goethite-malachite veins (rock chip assayed: 14% Cu, 1.77 g/t Au, 8 g/t Ag).
Oil Projects
The current Brazil projects are located in Reconcavo, Sergipe-Alagoas, Rio dos Piexe and Sao Francisco.
Drilling has occurred at Reconcavo and Sergipe-Alagoas. Both wells drilled on blocks 330 and 430 in Sergipe-Alagoas have been declared discoveries. The drilling that has occurred at Reconcavo on block 138 was put on hold when drilling reached a total depth of 850 meters due to time constraints under minimum work obligations required by the Brazilian government oil agency the ANP. An extension of 80 days has now been approved by the ANP.

Management overview


Taken from website
Phil Galloway
Phil has over 20 years experience in mining and energy projects as an engineer, investment banker and company executive. Phil has held senior roles at BHP Billiton, CS First Boston, RioTinto and Esso Australia.
Phil was based in London for 5 years during which time he was a member of the executive committee for BHP Billiton Aluminum, a division with over 6,000 employees and a value in excess of $12Bn.
Phil's other executive roles at BHP include Vice President for Gas Development and corporate planning manager for BHP Petroleum.
He was also part of the small team that completed the $36Bn merger of BHP and Billiton.
At CS First Boston, Phil advised the Victorian Government on the privatization of the Electricity Supply Industry including leading transaction worth in excess of $3Bn. Prior to that, Phil had various commercial and technical roles at Esso Australia.
After graduating from engineering 1987, Phil worked for 5 years as a senior engineer and project manager for CRA Ltd (now Rio Tinto) in Australia and Papua New Guinea
Phil holds a Bachelor of Engineering from Monash University and a Graduate Diploma in Management Studies from the University of Melbourne. He is a member of the Australian Institute of Company Directors.
Phil is based in Melbourne


John Weston
John is a petroleum geologist with over 30 years of international experience gained with BP, Gaffney, Cline & Associates and Schlumberger. John is experienced in all aspects of technical and commercial evaluation of upstream projects and exploration programs. He has had operational and development experience on oil and gas projects around the world.
John established Eromanga's Brazilian business using extensive, in-country experience and contacts that were developed during his postings to Brazil, first with BP and later with Gaffney Cline. He is fluent in Portugese.John is based in London.


Christian Turner
Christian trained as a geophysist and worked in that role with Schlumberger and BHP Petroleum. He later specialised in financing, developing and managing resource and agricultural companies.
Christian is also the Managing Director of Bisan Limited an ASX listed company with interests in pelletizing technology and vanadium and magnetite resources located in the Republic of South Africa.
In 2000 Mr Turner was executive director of the ASX listed company Redport Limited and appointed Chairman in 2002.Christian is based in Melbourne


Josh Goldhirsch
Josh has extensive experience in property and commercial law and litigation. He was admitted as a Barrister and Solicitor to the Supreme Court of Victoria in 1999 and has been a partner of the law firm Goldhirsch Shnider since 2000.
Josh graduated from Monash University with a Bachelor of Commerce and Law (Honours). He also holds a Masters of Law from Monash University.
Josh is based in Melbourne.


Brazil oil projects


Sergipe-Alagoas




























Block 330






















Paca1
Eromanga is a 40% participant in the concession agreement with the remaining 60% held by the operator, Nord Oil and Gas. In January 2008 the joint partners re-entered Paca1 that was a Petrobras discovery well drilled in the 1960’s. The existing casings were in good condition to support production and in March 2008 Paca1 was announced to the ANP as a future producer.
In October 2008 the ANP granted the extended production testing licence on block 330 for Paca1 which has had an average producing flow rate of around 60 bopd since with a slight decline in January due to different techniques to increase the flow rate being trailed during this production testing stage.
The low flow rates at Paca1 are believed to be the result from part of the production area of the well being cemented over during the drilling phase in January 2008. The well has significant oil shows over an interval of 104 meters. But due to the age of the well and some damage areas in the well, it is expected the current flow rate will stabilize at between 60 and 70 bopd.
When Paca1 was drilled back in the 1960’s during the swab testing by Petrobras they recovered oil with an API of 28 on two intervals at around 550meters. The current oil being produced form Paca1 has an API of 18. This could suggest that this was due to some of the well being damaged during the re-entry in 2008 and has greatly decreased the production zones of the well.
The formations in this area (Morro do Chaves Member, Penedo Formation and the Barra de Itiuba) have been described as vuggy. But it is difficult to predict deliverability rates from these fractured, vuggy carbonates which are also likely to have low reservoir pressures (shallow field) but will be under pump. The Figure of 20% recovery is optimistic and includes provision for fracture stimulation.

Paca2
Paca2 was drilled late December 2008 and early January 2009 next to PEO-14 mineral hole which was drilled in the 1980s and the well report only became available to the Joint Venture geologists in September 2008. When this report became available to the JV it allowed them to greatly increase the reserve estimate on block 330 from 7m recoverable barrels to 16m recoverable barrels based on the 2P on the table below.










The PACA 2 well is approximately 1 km to the NW of PACA 1, and was drilled up dip of Paca1. Oil shows were recorded over a total of 232 meters through three intervals including shows in
the deeper Serraria Formation. Due to oil being discovered in new formations Paca2 has been lodged with the ANP as a new oil discovery.
Please see Paca2 mud logs below


















The 232meters of oil shows has allowed the JV to again upgrade the reserve size which will be released after flow testing with a work-over rig to be completed in February 2009. These upgrades are expected to be significantly greater than the previously announced peak rate for the field of 2000 barrels of oil per day (bopd) and proved plus probable reserves of 11 million stock tank barrels.
The JV has also announced that the porosity was much better than expected throughout the different formation intervals. But due to the shallow depth of the well, pressure still remains a concern.


330 Capex
Due to the shallow oil depths on block 330 they are very low cost wells. The JV has formally advised Brazil’s oil industry regulator, the ANP, that it is planning a commercial development of the oil field and has formally requested the retention of a large portion of the block. This development plan was announced to the market to be a total of 14 wells. The current number of wells drill so far on block 330 is 2. There has been suggestion in some market updates that the JV will look at ways of increasing the pace of the fast tracking of this project. The JV has already announced that it plans to have the full field development of 14 wells completed within 3 years. The world oil industry standard time frame for bring full field development on line is 5 to 7 years. The cost to Eromanga is Aproxamently $800,000.00 per production well. This will mean another $ 9,600,000.00 will be needed to be spent to bring the full field into production. Based on the Mercury report I expect another $12,000,000.00 required on the Capex for infrastructures on this project.


Based on announced production rates of 2000 barrels per day this would give the reserve a life span of 22 years.
At this point I must complement the company for making it easy for investors to see where investor monies have been spent by supplying photo’s of the progression of projects. Below is the photo’s of 330. The first was released in the June 2008 investor update




















The second was released on October 14th 2008.






















In this 5 month period it is easy for investors to see how the company monies have been allocated and also how progressive the company has been with its projects in such a short time period.

Block 430

Block 430 was announced a discovery back in May 2008and is located close to several fields- Angelim, Carmopolis, Siririzinho and Riachuelo. Block 430 has an oil column of a 143m over 3 formations. The strongest shows were in the upper carbonate as indicated in the oil log below and this area has a porosity of 27% over a 4 meter interval and the oil has a API of 30-32 with no water shows in the upper carbonate.





































430 was drilled on the flank of the reserve as shown in the picture below.






















Like 330, once they drill the up dip appraisal well in the second quarter of this year we could see the same results as we have seen in 330 with major upgrades of the resource and new discoveries. Flow testing is also due to start in the second quarter in 2009 of the upper carbonate and the other 2 sections (the lower carbonate and the basement) will be tested again when they drill the appraisal well.
The neighbouring field block 429 operated by Petrobras and Petrogal made a discovery over the same intervals. During their testing stage they flushed the well with glycol; this seems to have stimulated all 3 intervals. The Eromanga JV is currently waiting on a report from Petrogal as to the long term effectiveness of using glycol and this appears to be the reason why the JV pushed the long term production testing back from February to the second quarter.

In conclusion
I have tried in this report to remain as close to the facts as I can and not add personal opinion. But in my conclusion I will add my personal views of this company and their projects. I will also cover the other oil projects in later Blog updates.

The directors of Eromanga Hydrocarbons NL announced that ERH entered into a binding Heads of Agreement (“HoA”) to farm in to a package of oil and gas exploration blocks with Gavea Oil & Gas on the 25/07/07. Within 18 months from the signing of the HoA Eromanga has proved up 26 million recoverable barrels of oil and become a producer.

It has been a fast paced ride with this company and although the share price was effected during the 2008 credit crunch and subsequent collapse in oil prices, the production, exploration and field development plans seem to be little changed.


I also dont think that the share price tells the full story and it may be the perfect time for ERH to be making its move onto the world stage. After a couple of years of effective fund raising and a very successful exploration period during 2008, the company has set it self up well for 2009. And with the reductions in costs for drill and work-over rig hire due to falling oil prices and tightening credit markets should make field development a lot more affordable and the equipment required more readily available.

It does seem clear however that the company will be looking to do capital raising in 2009 but what is not clear is how they will be approaching this, either with placements or calling in some of the out standings on the partly paid options. Yes it is nice to have choices, especially with the current world market conditions.

All in all, for all the reading and research I have done on this company, I only see it as a buy and no real major red flags have presented themselves. Besides for a few delays with drilling scdules and some hickups with Silver Marlin which i will cover in later blogs. It has been a pretty clear run

I also found it quite refreshing to see company directors of the caliber that ERH have who could be receiving massive salaries in large multinational companies such as BHP and alike, happy to make up their salary with bonus shares that are only issued after targets and hurdles are met. They are not there to bleed the company coffers dry with huge cash salaries each month.

As far as I can see, as long as ERH remains focused on the job at hand which does seem the case then the risks seem minimal at a share price of .20c. ERH should also be approached as a medium to long term investment

Coming Blogs
I have contacted a couple of friends in the oil industry who have agreed to help me compile a user friendly oil field glossary. This glossary will be directly related to Eromanga’s announcements as they are released. But should be still user friendly enough to be able to be related it to other oil companies and give the reader a basic understanding of oil field jargon and technical data and how this relates to your investment.
There will also over the next week or so be a complete over view of all other ERH projects.

Also a BIG thanks to those that help put this together
Cheers guys