Canacol Announces 2010 work programme for Capella

Canacol announced recently that it is to spend $4.1m in 2010 to appraise and develop Capella.

Sinochem's share therefore ~$37m. It seems unlikely that Emerald would have needed a placing to fund this. Especially as the pace of work in Syria has slowed down, and GPX seem to be generating lots of cash there.

Emerald Shareholders Approve the Scheme of Arrangement

The Court Meeting and EGM were held today and the required number of votes were cast to approve the takeover of Emerald Energy by Sinochem.

http://www.advfn.com/p.php?pid=nmona&article=39731673&epic=EEN

Most shareholders haev done well form this transaction, but a nagging doubt remains that the company and management could have delivered even more if they had been allowed to remain independent for another couple of years.

Since the bid was announced Canacol have indicated that the Oil in Place at Capella could be twice earlier estimates at some 2.2bn barrels in place; the testing results at Mirto have indicated at least one zone will be commercial and it does appear as though the Caballos will be commercial at Gigante-2 as well as the Tetuan.

Speculation on Hostile Bid for Gulfsands

Today, the Daily Mail has run an article speculating that Sinochem may launch an hostile bid for Gulfsands Petroleum (GPX), Emerald Energy's 50:50 partner in Block 26 in Syria.

Contrary to what the article says, Gulfsand shas 120.22m shares in issue and 129.05m shares after options are exercised. This fully diluted number of shares in issue would place a value of ~£419m on Gulfsands @ 325p/share.

One might assume GPX's Gulf of Mexico assets are worth very little and with gas prices trading near multi-year lows, the assets being cash consuming this year, and seemingly accident prone from hurricanes that does not look unreasonable.

Of course, the full bid value for Emerald Energy is 750p/share or £532m. Then if the rumoured GPX deal werer to go ahead, it would effectively put a value of ~£113m on EEN's Colombian assets (or 161p/share, compared to Jeffs RENAV of 557p/share for Colombia).

It is certainly looking like the Emerald bid was agreed at too low a price.

Syrian Operations Update

Emerald Energy and Gulfsands have today announced an operational update for Block 26 in Syria.

In summary, the progress looks very encouraging. The Gulfsands announcement contains more detail and can be found here:

http://www.advfn.com/p.php?pid=nmona&cb=1252476751&article=39378236&symbol=L%5EGPX

In short, the Khurbet East field delineation well, KHE-12 looks like it will have a positive impact on the mapped size of the field, and hence reserves.
Y-1 is going to produce.
Unclear if Y-2 is commercial but it is assisting in understanding of the Yousefieh geology.

Day by day, it is looking to me like the decision to sell Emerald @ 750p/share was made precipitately and that the price is too low.

How Should Emerald Energy Shareholders Vote?

Until now, I have consciously tried to fashion this blog as a place where a great deal of research is assembled and presented in a more or less neutral fashion so that visitors and investors can make up their own mind about the company.

However, now that the Circular has been published, the time is rapidly approaching where investors have to make up their minds about whether to accept this 750p bid from Sinochem. So, I have decided to temporarily break my own rules and write an "editorial" about my specific views on the bid, and whether it should be accepted or not.

Background

There is some anecdotal evidence (for which I can give no reference so I cannot confirm its veracity) that Emerald received a bid approach of ~650p/share either shortly before or shortly after Christmas. As bids for oil companies are generally valued in US Dollars, and the $:£ was about $1.45 at that time, let us say it was the equivalent of $9.40/share. Apparently, this was dismissed out of hand without even consulting the wider board. At the time the oil price was ~$40/bbl, and we were in the teeth of the credit crunch.

For several years many investors (this investor not among them) have bemoaned the company's "low-key" approach to PR. However, since the alleged approach described above, the behaviour of the company has subtly changed from prior behaviour. The first example is that in the 2008 results presentation published on 16 March 2009, the company gave Oil-in-Place (P10 of 1.1bn barrels) estimates and contingent resources as well as 2P reserves for the Capella field. This is the first time current management has done such a thing for any of its prospects that I can remember. The second example is in the 30 April announcement of reserves for Block 26, they gave a "life of field" (as opposed to life of contract) estimate of reserves for Khurbet East and a contingent resource figure for Yousefieh. Interestingly, Gulfsands did not give either number in their corresponding release. I cannot recall a prior occasion where Emerald volunteered more information than their partner in relation to Block 26, in fact quite the contrary was often true. One may conclude that this change in behaviour was designed to support the share price, perhaps in anticipation of a further bid coming in.

Then, strangely, in April when the share price was starting to rise strongly, the company converted one tranche of the Convertible Bonds, which had the effect of temporarily depressing the share price. The true motive behind this move has never been properly explained, in my view.

At the AGM/EGM on 24 April, I was asked, along with another investor, by the senior NED what we thought Emerald was worth. My stance was I wouldn't give a value for what it was worth now, because I didn't think now was the time to sell, but that I would hope for £15-20/share in about 2 years time. I have attended a number of Emerald Energy formal meetings, and I've never been asked a question like that before. I thought it a little strange at the time, but thought no more of it.

Operational Progress

Since the formal reserves statements made for Colombia in March, and for Block 26, Syria made at the end of April, the company has made very significant operational progress that has not yet been quantified in terms of precise recoverable reserves, but nevertheless will have had a material impact on the value of the company.

First, in April, we received the results of the Capella-6 well which encountered a net hydrocarbon interval in the upper Mirador approximately 4 times thicker than other wells and with porosity of ~37% (about that of beach sand). The impact of this well has not yet been formally quantified, but it does not take a geological genius to come to the conclusion it must have made a very material improvement to the oil in place and recoverable reserves. Moreover, it was announced on 20 August that the planned horizontal well planned for the C-6 area had been postponed, that the company had commenced drilling two slim-hole wells to better delineate the extent of the thicker Upper Mirador area, that steam injection was due to start testing and they had received environmental clearance to drill the northern "Romero" section of the field. It seems the main purpose of this work is to prove up more of the field and determine the recovery factors with horizontal wells and steam injection. Given that this work is likely to add significant value to the field, it seems strange to accept a bid at this time when the results are unknown.

Second, the Gigante-2 well has been drilling and testing since December 2008. We know partial results from the Caballos horizon that look encouraging so far, and we await results from the Tetuan formation. The pre-drill prognosis for G-2 is 15mmbo from the Caballos and 4mmbo from Tetuan. However, we must also remember that the pre-drill prognosis for Capella was for some 30mmbo recoverable, so the published company estimates may well be conservative. As confirmed positive results from this well will likely have a very material impact on the value of the company, again it seems strange to agree a bid before the results are known.

Third, The Mirto-1 exploration well is still being tested, and the bid was agreed before the results were known. Moreover, according to the RNS today from La Cortez Energy – the partner in the Maranta block – indicated that Emerald had also identified several promising leads in Maranta. Presumably, the apparent success in the U-sands confirms the prospectivity of at least some of the play types. So, again it is very strange to accept an uncontested bid when the results of the well are not known, and no estimate of recoverable reserves has been given – pre-drill prognosis 5-15mmbo.

In Syria, the reserves statement given on April 30, apparently did not take account of the fact that the KHE-8 well flowed oil, apparently in commercial quantities. That fact that it has flowed, probably increases the recoverable reserves. Further, on 6 August, just before the bid was accepted, Emerald and Gulfsands said that they had just commenced drilling KHE-12; a well designed to further test the Southern limits of the field, and may, perhaps, lead to a further increase in reserves. Moreover, a workover programme on Yousefieh-1 & 2 and KHE-7 has commenced, again the primary purpose appears to stimulate the wells with acid, improve flow-rates and increase reserves. Although this may now be getting repetitive, why accept a bid when there is work going on, that will not take a great deal of time to conclude, that may have a material positive impact on the value of the company. In addition, the Khurbet East Kurrachine Dolomite and Butmah formations have still not yet been appraised, and we have not seen the results of the "Commercialisation Study" due to be completed in 2Q09. And finally, an extensive 3-D seismic programme has recently been completed over the Khurbet East fairway. So, far 10 leads and prospects have been identified, and the formal prospect inventory is due to be published in November – according to a broker note on Gulfsands published today.

The Bid

First we had the bid "courtship phase" as the approach was announced. As described above, the company embarked upon the furious work programme ostensibly with the purpose of increasing the value of the company. However, at a similar time, an interview with Michael Kroupeev was published where he was quoted as saying 750p was a "good number".

Then, before any of this work was concluded and before the results of the exploration wells were completed, the actual agreed bid was announced. It is usual, indeed some would say essential, for any first bid to be re-buffed in a show of mock outrage that the bidder puts such little value on such world class assets. However, in this case, the company seemingly accepted the first offer, apparently with some board members under a three-line whip, that was made at some 750p/share. Coincidentally at the same level that Mr. Kroupeev had indicated was "good". Just two days later, it was announced that Mr Kroupeev's investment vehicle, Waterford, was making a significant investment in Sterling Energy (SEY) and that Alastair Beardsall was going to take the position of Executive Chairman there. It is difficult to avoid the conclusion that both deals are in some way connected.

The 750p/share offer translates into ~$12.30/share (@$1.65/£) or some ~30% above the bid that was allegedly rebuffed out of hand earlier in the year. However, the world economy now seems to be starting to recover from the credit crunch, and oil is nearer $70/barrel.

This is in contrast to the 11 June 2009 note from joint broker Jefferies that calculated a core NAV for the company at some 863p/share, with total NAV of some 1,109p/share and unrisked NAV of 1,747p/share. The 1,109p/share is made up of 557p/share for Colombia, 485p/share for Syria and 67p/share of cash.

Furthermore, it has been rumoured in the Daily Mail, that Gulfsands has also received an approach (denied by the company, but not by official RNS) from Sinochem valuing Gulfsands at ~£400m. If this were true it would put a value on Emerald's Colombian assets of ~£130m (or less than £2/share), which given the sheer size of Capella, amongst other things looks way too low.

Conclusion

I have now come to the conclusion that the company is in rude health and has an impressive array of exploration, appraisal and development projects that can be progressed to add significant further value in the medium term. And the company's own broker has placed a much higher value on the company than has been agreed by the board.

Moreover, in the next few months, there are numerous current activities that will also add significant value to the company, namely:

a) Full Mirto results, plus an estimate of recoverable reserves and contingent resources and disclosure of the Maranta prospect inventory.
b) Full Gigante results and disclosure of estimated recoverable reserves and contingent resources plus disclosure of the anticipated prospectivity of the new VSM-32 block.
c) Results of the slim-hole programme in Capella together with results of the horizontal well, steam injection and drilling of Romero.
d) Workover programme in Syria
e) Prospect inventory for Block 26.

Accordingly, I will not accept this 750p/share offer as I think it is far too low and the company is too early in its lifecycle to succumb at this stage. And although I am not qualified to give financial advice, I would urge other investors to vote "No", and either hope for a counterbid or watch patiently as the talented management team continues to deliver. I am running a poll on the advfn thread that gives shareholders an opportunity to collectively express their view about their voting intentions.

However, I hold no grudge against Michael Kroupeev, Waterford or Alastair Beardsall. If Waterford wishes to sell, then in a free-market, it must be allowed to do so. It is not clear whether Sinochem will be temporarily happy with just his stake at 750p. Similarly, if after delivering such spectacular results over six years, Mr. Beardsall has decided it is time for a new challenge, then good luck to him.

Scheme Circular Published

The Scheme Circular and timetable of events has been published on Emerald Energy's website:

http://www.emeraldenergy.com/The_Scheme_Circular-7_September_2009.pdf

Emerald Energy Stock on Loan Data

Using the Euroclear website, it is possible to track the stock on loan information for a range of stocks including Emerald Energy. This is a proxy for the outstanding short positions.

The progression of data for June, July and August 2009 goes as follows:

June Stock on Loan: 1,522,335 2.67%
July Stock on Loan: 1,939,294 3.39%
August Stock on Loan: 2,562,942 4.47%

On the face of it, it would seem strange that the stock on loan and hence short positions should increase markedly as the share price has risen to reflect first the announcement of the bid approach and then the agreed offer, since the effect would be for the holder of the short position to lose money.

Mirto Results Declared

Emerald Energy has released the reuslts of testing 3 of the 4 prospective horizons from the Mirto #1 well on the Maranta block.

Two of the tested horizons (Caballos and Viletta T) do not look promising, but the third, the Viletta-U formation has tested ~730bopd over a 48 hour period. The company sounds quite excited about the discovery. The fourth horizon, Viletta N, is currently being tested.

We shall have to wait and see if this apparent discovery is reflected in an adjustment to the agreed takeover price.

http://www.advfn.com/p.php?pid=nmona&article=39289193&epic=EEN

More information may be forthcoming from La Cortez Energy who hold a 20% interest in the Maranta block.

Speculation that Sinochem has made a bid for Gulfsands (GPX)

The article below speculates that Sinochem is in takeover talks with Gulfsands (GPX) with a takeover price of c. £400m, or c. 325p per share.

http://www.thisismoney.co.uk/markets/article.html?in_article_id=490168&in_page_id=3&position=moretopstories

And now Reuters is running the same story:

http://uk.reuters.com/article/idUKTRE57T1B220090830

As is Arabian Business News and the New York Times:

http://www.arabianbusiness.com/566310-gulfsands-in-takeover-talks-with-sinochem--report
http://www.nytimes.com/reuters/2009/08/30/business/business-uk-gulfsands-sinochem.html

Of course Sinochem has already agreed a 750p or £532m bid for Emerald Energy (EEN). The common asset between the two companies is Block 26 in Syria.

The sad thing for Emerald shareholders is that the Gulfsands deal at the rumoured price would effectively put only a ~£130m price tag on Emerald's Colombian assets. These include the very significant Capella field which has estimates as high as 1.1bn barrels in place, Gigante (where we still do not know the full results of testing the Caballos or the Tetuan) and the recently drilled Mirto prospect, where drilling results are now well overdue.

Bid Agreed for Emerald Energy

Of course a 750p bid has now been made for Emerald and agreed by the board.

This is below what many investors hoped for. However, the major shareholder, Waterford, run by Michael Kroupeev, has subsequently announced he is making a major investment in Sterling Energy (SEY). This perhaps explains the hurried nature of the Emerald transaction and its timing. Key Emerald directors, Alastair Beardsall and Keith Henry are also becoming directors in Sterling Energy.

Emerald Announcements:

http://www.emeraldenergy.com/Letter_from_the_Executive_Chairman.pdf

http://www.emeraldenergy.com/Rule_2.5_Announcement.pdf

Sterling Energy Announcement:

http://www.sterlingenergyplc.com/placing14aug.aspx

La Cortez Bullish on Mirto Results so far

La Cortez Energy, parter in the Mirto-1 well in the Maranta block, has released a press statement to the effect that based on the preliminary results of the drilling, La Cortez has elected to participate with Emerald on the evaluation phase of the well and is pressing ahead to file a request with ANH for a 20% interest in the Maranta block. It seems they are encouraged by the oil and gas shows in the target horizons.

http://finance.yahoo.com/news/La-Cortez-Energy-Announces-an-bw-3648134323.html?x=0&.v=1

http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20090728006487&newsLang=en

Note that the references in the above articles to Emerald Energy being listed on AIM, are incorrect. Emerald Energy is listed on the main board of the London Stock Exchange and is a constituent of the FTSE-250 index.

Emerald Announces Interim Results

Emerald Energy (EEN), has today announced its Interim Results for 1H09.

Link: http://www.emeraldenergy.com/documents/EEN-1H2009RESULTS.pdf

And has been covered by the following agencies:

http://www.reuters.com/article/rbssEnergyNews/idUSBNG52367320090727
http://www.rttnews.com/ArticleView.aspx?Id=1016263

The key highlights are:

Exploration

Gigante-2

Increased production rate from the Caballos from 185bopd to 745bopd through the use of an Electrical Submersible Pump (ESP). The company is looking at ways to further reduce formation damage and further increase production rates. Hopefully, they can prove beyond doubt the Caballos is commercial before moving on to produce the Tetuan horizon, which ought to have a significant impact on Colombian production levels.

Mirto

The Mirto-1 well has now reached target depth and encountered both oil and gas shows across the target horizons. The well will now be evaluated over the next two weeks.

Capella

A slim-hole rig has been contracted to drill 2 wells delineate the extent of the thicker upper horizon discovered around the Capella-6 well. The company re-iterated plans to drill the C-7 horizontal well later in the year. There was no mention of the previously announced plans to drill in the NE part of the block after C-7H, but presumably those plans are still in place.

Syria

It appears that the EPF expansion is on track to come on stream soon to increase gross production up to 16,000bopd (50% WI to EEN) as the new wells are brought on stream. The KHE-11 horizontal well is still being drilled. The processed data from the recent 3-D seismic survey are expected late in 3Q-09. More exploratory drilling in Block 26 may commence before year end.

Financials

In 1Q09, EBITDA was $9.9m, or thereabouts. Total EBITDA for 1H09, was $32.2m, so 2Q09 is $22.3m, or more than double the 1Q09 number. Production fairly stable, so, a big impact from higher oil prices.

But cash has gone down from ~$59m to ~$37.8m - which shows the level of investment being put in to Colombia and Syria - G-2, Mirto, Capella, 3-D seismic and development wells.

All in all, this looks like a very solid set of results that bode well for even further improved 2H09 results together with significant increases in reserves and production.

Corporate

Interestingly, the directors have options in the company, some of which expire in August this year. However, because of the bid approach, the company is in a "closed period" so the directors cannot exercise their options. Under the scheme rules, they have extended the option expiry period until 10 days after this "offer period" expires. Perhaps an indication that they do not expect this bid approach process to complete quickly.

Press Speculation on Bid Approach Candidates

There has been speculation in the press as to the identity of who has approached Emerald Energy with a potential bid.

These include:

UPI suggesting one or both of Sinopec and CNOOC

http://www.upi.com/Energy_Resources/2009/07/14/Takeover-bid-for-Emerald-Energy/UPI-11291247589639/

In today's Telegraph there was a small piece where it was suggested Cazenove analysts believe it is a consortium consisting of a Chinese company and OGNC:

http://www.upi.com/Energy_Resources/2009/07/14/Takeover-bid-for-Emerald-Energy/UPI-11291247589639/


Sinopec "has form" acquiring companies with interests in both Colombia and Syria.

The first is in a consortium with OGNC acquiring Ominex in 2006. Ominex had operations in Colombia:

http://www.ibtimes.co.in/articles/20061206/ongc-sipc-oil-colombia-ominex-acquisition.htm

and this link which gives a better insight into the valuation:

http://www.financialexpress.com/news/ovlsinopec-pay-800-m-for-50-in-omimex/174353/0

Sinopec also took over Tanganyika last year which had "heavy oil" operations in Syria:

http://www.chinadaily.com.cn/bizchina/2008-09/28/content_7067375.htm

Of course Sinopec has also recently agreed a takeover of Addax which had operations over the border in the Kurdistan region of Iraq:

http://www.theglobeandmail.com/globe-investor/sinopec-agrees-to-buy-addax-for-8-billion/article1194761/

Main Assets Gigante Matambo/VSM32

Perhaps the most enigmatic asset in the Emerald portfolio is the Gigante field. Originally drilled in the late 1990's, the G1A well produced at rates in excess of 4,000bopd before a spectacular blow-out, the aftermath of which brought the company to its knees.

The resource numbers published by the previous management were quite mouthwatering. The Annual Report for the year 2000 (http://www.emeraldenergy.com/Emerald-Energy-AR-31-12-2000.pdf pp3-4) talked of up to 350mmbo in place for the "Upper Caballos" - for which probably read Tetuan, with the "Lower Caballos" perhaps being three times as thick. A further RNS (http://www.investegate.co.uk/Article.aspx?id=199908231044283858D) indicated the Caballos could have as much as 500mmbo oil-in-place.

The 2001 interim results (http://www.advfn.com/p.php?pid=nmona&cb=1247558517&article=1722560&symbol=L%5EEEN) also showed that the prior management believed there to be up to 930mmbo in place at Gigante, with 230mmbo in the Tetuan and 700mmbo in the Caballos.

It must be stated that current management have never re-iterated these numbers, and have also since carried out their own 3-D seismic. So, the prior management numbers have to be treated with some degree of scepticism. The company published the results of the prior testing and some of the 3-D seismic results in 2006: http://www.emeraldenergy.com/EmeraldEnergyPlc-58km2_3D_seismic_programme_Gigante_field.pdf

However, investor's long wait to find out what is really in the Gigante structure should soon be over as the ~$35m G-2 well was spudded in December 2008, targeting 4mmbo in the Tetuan and 15mmbo in the caballos. The well reached target depth last month.

Early results showed that both the Tetuan and the Caballos formations were encountered at shallower depths than the pre-drill prognosis. (http://www.emeraldenergy.com/PR20090623.htm) with the Caballos formation being 163' thick (gross) with 107' net thickness. The Tetuan was 32' thick, gross and net.

In an RNS dated 14 July 2009, the company indicated that a test over a perforated interval of 84' in the Caballos flowed oil under natural flow at a rate of 185bopd. The company is delighted with this result and is now going to proceed to flow-test with the aid of an Electrical Submersible Pump (ESP). In an RNS on 27 July, the company said the ESP had raised the production rate to 745bopd, and they were working to further increase that by reducing the formation damage. After that, they will move on to test the primary target: the Tetuan.

Recently, the company has taken on the VSM-32 block which is adjacent to the Matambo block in which the Gigante field can be found. An indication of its prospectivity could maybe be gleaned form the company's commitment to drill an exploration well within the first exploration term of the block (http://www.emeraldenergy.com/VSM32.htm) - presumably wells on VSM-32 will cost a similar amount to G-2.

Main Assets - Block 26 Syria Khurbet East/Yousefieh

Emerald is 50% owner of Block26 in Syria. The other half is held by Gulfsands Petroleum (AIM:GPX http://www.gulfsands.com/ ) who is also the operator.


Khurbet East


The main asset is the Khurbet East field, discovered in 2007 with the drilling of the KHE-1 discovery well.


This well flowed oil from the Kurrachine Dolomite (K-Dolly) formation and gave further encouraging results from the Massive and Butmah formations. The K-Dolly was flow tested at a rate of 478bopd. (http://www.emeraldenergy.com/Pr20070604.html). The test was done over a gross interval of ~100m, but the published logs from a Gulfsands presentation from October 2007 show a gross formation interval in excess of 250m (http://www.mediafire.com/?j1yezg52jvn Page 10). No further work has been done on Butmah and K-Dolly to date but it has been suggested that a commercialisation study for these formations is underway. It may be expected that significant reserves will result from future appraisal of these fomrations that are currently un-booked.


Appraisal and development effort has focused on the Massive formation where production is currently averaging ~10,500bopd and an expanded production facility is expected to lead to an increase in capacity to 18,00bfpd or ~16,000bopd (all EEN 50% WI) is expected to come on-line imminently. A Full-Field-Development facility is in the planning stages which may result in the field production capacity being lifted to 30-40,000bopd towards the end of 2010.


10 wells have been drilled to date, with KHE-11 underway.


The commercial terms of Block 26 are very attractive and have been best explained here: http://www.emeraldenergy.com/documents/20090126EENInvestorPresentation.pdf Slide 6).


59.2mmbo of 2P reserves have been booked for Khurbet East (63.4mmbo over the life of the field). EEN would have a 50% working interest in these reserves. However, since those reserves were published, KHE-8 - a delineation well has flowed oil and other new wells have performed better than expected, leading to a belief that the oil-in-place may increase as well as the recovery factor (http://www.emeraldenergy.com/PR20090430.htm).


Yousefieh

A new field, Yousefieh was discovered in November 2008 (http://www.emeraldenergy.com/PR20081119.htm). 11.3mmbo of 2P reserves have so far been booked against this field (EEN WI 50%). However a further contingent resource of 42mmbo oil-in-place has been allocated to the field pending further appraisal drilling and testing.

Main Assets - Capella Ombu and Durillo

Capella was discovered in the Ombu block in September 2008 with the following announcement from the company: http://www.emeraldenergy.com/PR20080916.htm

Interestingly, at around the time the C-1 results were announced, the Colombian Energy minster was quoted as saying the Capella structure may contain up to 100mmbo of recoverable reserves (http://afp.google.com/article/ALeqM5jW8IE1fEPb-21R8maWnJHOVR1Myw).

Since then 5 more wells have been drilled in the SW part of the structure, all with better than expected results. A horizontal well is due to be drilled later this year from near to the C-6 surface location. More appraisal wells are due to be drilled to the NE of the structure later in the year once permitting is completed.

So far the company has booked ~15mmbo of 2P reserves on the structure. However according to the company's 2008 results presentation (http://www.emeraldenergy.com/documents/EEN2008Results.pdf P22 onwards) these reserves were restricted to the area immediately around the first 4 wells to be drilled. The same presentation gave a P10 oil in place estimate of ~1.1bn barrels for the whole structure. The results of C-5 and C-6 were also encouraging. C-6 noted 37% porosity in the Upper formation which was some 80' thick at that location, nearly four times thicker than in the other wells (http://www.emeraldenergy.com/pr20090424.htm). This bodes well for further reserve and oil-in-place increases as the structure is proved up.

I believe, but have not had confirmed, that the recovery factor of 10-11% given in this report relates only to cold flow. The recovery factor may well increase if thermal methods are applied. There are links available that demonstrate some heavy oil fields can achieve recovery factors in the range of 30-50% and even up to 70-80% in some cases with the application of a varity of mehods such as Cold Heavy Oil Production with Sand (CHOPS), Cyclic Steam Injection (CSS), Steam Assisted Gravity Drainage (SAGD) and Steam Flood. A number of these techniques are descrbied in these links: (http://www.slb.com/media/services/resources/articles/heavyoil/200801_ao_heavy_oil_recovery.pdf
http://www.slb.com/media/services/resources/oilfieldreview/ors02/aut02/p30_51.pdf
http://www.heavyoilinfo.com/blog-posts/comparing-css-and-sagd-to-thai/view
http://www.energy.gov.ab.ca/OilSands/pdfs/RPT_Chops_app2.pdf
http://www.slb.com/media/services/resources/articles/heavyoil/200801_ao_heavy_oil_recovery.pdf)

Canacol Energy (formerly known as Brazalta), the 10% part owner of the Ombu Block has said that a cyclic steam injection pilot in one of the vertical wells is planned this year (http://www.brazalta.com/files/news/April%206%20Press%20Release.pdf).

Canacol have also recently announced that they have been awarded a Technical Evaluation Agreement (TEA) in acreage adjacent to the south of the Ombu block (http://www.brazalta.com/files/news/July%202%20Press%20Release.pdf). Moreover, Canacol have recently given an audio presentation which mentions the joint plans for Capella a link to which can be found here: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2701160 and here: http://podcast.newswire.ca/media/canacol.mp3

More recently, the company has acquired the adjacent Durillo block where it believes the block "may have potential in the same exploration play".

Production so far has been limited to ~700bopd test production from three of the initial wells. Production has been limited by transport and marketing constraints which the company is confident it can overcome.

All in all this is a very important asset for Emerald, and could be worth many £'s/share (try doing the sums on 1.1bn barrels in place with 30, 50 & 70% recovery factors and say $5/bbl for heavy oil) in its own right as it develops.

Background Research Notes

Below is a link to a recent article published by Pro-Active Investors that gives useful background information on the history of the company and its major assets.

http://www.proactiveinvestors.co.uk/companies/news/4407/emerald-energy-the-transformation-continues-4407.html

Here is a summary of a recent note from joint brokers, Jefferies International


Key Points

• Preconceptions wrong. With little evidence of heavy handed security we found Damascus and Block 26 to be both safe and free. While red tape remains an issue (particularly concerning
imports) Syria is definitely open for business and progress is being made giving us confidence that full development of the Khurbet East field can be completed on time and on budget.

• Khurbet East reserve upside still possible. Failure to establish a firm oil water contact within the Khurbet East reservoir leaves open the possibility that a deeper contact could be determined materially adding to oil in place estimates. We understand plans are underway to drill an appraisal well to the south of KHE-8 to test this upside.

• Exploration activity set to accelerate in 2010. Following receipt of initial results from recent 3D seismic programme Gulfsands management is bullish that a number of interesting
leads have been identified and that exploration activity would materially increase in 2010 ahead of licence expiration in Aug 2012. While we believe this unrecognised exploration potential adds to an already attractive upside until leads are high graded to drillable prospects and a second rig is secured we believe it is premature to include this upside within our NAV.

Valuation/Risks

We have a core NAV for Emerald of 863p/sh and a risked upside of 246p/sh. Our total NAV of 1,109p/sh is made up of 557p/sh for Colombia, 485p/sh for Syria and 67p/sh of net cash and working capital. Fully de-risked our NAV rises to 1,747p/sh.

Our target price of 750p is set at a 20% discount to core NAV reflecting higher than average risk aversion and bottom of cycle oil prices.

Risks include disappointing appraisal results, unsuccessful exploration, political risk and development risk.