Shares in Empyrean Energy (LON:EME) shot up 20 per cent this morning as it revealed a 40 per cent uplift in reserves at the Sugerloaf project on the Eagle Ford shale in Texas.

Through its 3 per cent interest in the project AIM quoted oil investment group now has 3.2 million barrels of oil equivalent in proved and probable reserves, which it says is worth 16.8 pence per share to Empyrean.

Investors welcomed the news as the shares gained 0.875p, about 17 per cent, to trade at 6.125p each.

"The increase in proven and probable reserves was anticipated in the design of the 2011 drilling program. The 2011 drilling program has been extremely successful,” said executive director Tom Kelly.

“We are delighted that further fundamental value has been unlocked and that the project has been further de-risked. 

“The independent report adds confidence to the participants and will pave the way for further development. We are 22 wells into an anticipated 276 well full development.”

Kelly also highlighted that Marathon Oil Corp - one of the larger American oil firms – will be taking control of the Sugarloaf project next month as it assumes the operator role. 

“(Marathon) has shown substantial faith in the Eagle Ford Shale,” Kelly said. 

“We note that they are excited at the prospect of being able to add significant value to their Eagle Ford Shale acreage and expect that this will have a positive impact at Sugarloaf. 

“Empyrean has been trading at a discount to the Net Present Value discounted by 10 per cent of its 1P reserves and a greater discount to the NPV10 of its 2P reserves for our Sugarloaf Project alone - we hope that this reserves assessment starts to reverse that situation."

In this morning’s statement Empyrean said its share of proven reserves (1P) has increased by 41.7 per cent to 1.5 million barrels of oil equivalent, while proven plus probable reserves (2P) increased by 39.1  per cent to 3.2 million barrels oil equivalent.

The 1P reserves is valued at US$30.8 million which equates to about 8.9p a share and 2P reserves are valued at US$57.7 million which equates to 16.8p a share.

Empyrean Energy (LON:EME) updated the market on its key Sugarloaf gas and condensate project in the US with data including early stage production from one of the wells.

The company said production from Buehring No.1H well, in which it has a 3% stake, averaged 645 barrels of oil equivalent over a 60-day period.

The update also notes that the PMT No1H well, in which it has a 1.11% working interest (WI), commenced production on 10th May 2011. The company will provide a production update on the well when it has achieved 30 days of production.

Elsewhere, fracture stimulation of both Davenport Nos 1H (1.4% WI) and Jordan No 1H wells have been completed and they are in the process of being flowed to sales.

Fracture stimulation of Best Huth Nos1H well (0.58%) is currently underway and once complete the well will be flowed to sales. At Best Fenner Nos 1H well (3% WI) drilling has reached a total depth of 18,020 ft and will be fracture stimulated in due course.

Stimulation of Gilley Nos 1H (3% WI) has only been partially successful with flow currently limited.

The Sugarloaf prospect lies just to the south of the main Austin Chalk trend in Texas. It is a highly prospective area but the brittle chalk can make for a difficult drilling environment.

The prospect sits between two large fields: Giddings to the north east has produced 4 trillion cubic feet of gas and 500 million barrels, while Pearsall to the west has produced 1 trillion cubic feet and 150 million barrels.

The whole target area covers about 200,000 acres. Empyrean took a 6% interest from Texas Crude Energy in a 23,000-acre section called Block B in 2006.

Earlier this month the company’s shares were in demand following a healthy trading update showing revenue from its US production assets had increased significantly over the past six months.

The shares also benefited earlier this month from an announcement that US oil giant Marathon has agreed to pay $3.5 billion for Hilcorp Energy’s assets in the Eagle Ford shale trend in Southern Texas.

Hilcorp is Empyrean’s partner and operator in the Eagle Ford Shale acreage on the Sugarloaf prospect.  The acquisition means Hilcorp’s interest in Sugarloaf will pass to Marathon.

In early morning trade Empyrean shares eased 0.25p to 6.75p. 

Shares in the firm, which jumped on the Marathon news yesterday, made further gains this morning. At 10:11am they were up some 9.5 percent at 7 pence each.

Monthly revenue from the US assets – which include the Sugarloaf, Hercules and Riverbend projects – grew from US$27.8 million in December last year to US$299 million in May. The total revenue generated during the six-month period was almost US$1.1 billion.

The increase in revenues has been primarily driven by the Sugarloaf Project as newly completed wells have been brought into production. Empyrean said that the project is now firmly into a development phase and the upward trend in revenues is expected to continue as further wells are brought into production.

Marathon, which is set to take over as operator at Sugarloaf after it acquired Hilcorp’s assets in the region, has made it clear that it intends to maximise profitable reserve and production growth across the Eagle Ford shale trend (where Sugarloaf resides).

Tom Kelly, Empyrean’s CEO, said that revenue is expected to grow since a number of further wells have been brought into production during the past few months for which the company has not yet received revenue.

“We believe that these wells coming into production is likely to have a positive impact on the implications for our proven and probable reserves position,” he said. “Given that we received revenue in April from only five wells at Sugarloaf and the full development currently is targeting 280-plus wells, we believe we have room for continued revenue growth."

Shares in Empyrean Energy (LON:EME) jumped by more than 10 percent in early trading this morning after Marathon Oil Corporation – the US’s fourth-largest integrated energy company – agreed to pay $3.5 billion for Hilcorp Energy’s assets in the Eagle Ford shale trend in Southern Texas.

Hilcorp is Empyrean’s partner in the Eagle Ford Shale acreage that Empyrean participates in known as the Sugarload Project, and it is also the operator of that project. The acquisition means that Hilcorp’s interest in Sugarload will pass to Marathon, and Empyrean expects that Marathon will announce that it intends to become the project operator there.

Marathon president and CEO commented that the Eagle Ford shale assets will deliver immediate production and reserve additions to the corporation, but with Marathon’s technical expertise and drilling knowhow it intends to maximise profitable reserve and production growth across Eagle Ford. 

Tom Kelly, Empyrean’s CEO, said: “Empyrean congratulates Hilcorp on this success and their transaction with Marathon which further demonstrates the high value attributable to the liquids rich Eagle Ford Shale acreages as they become proven. Empyrean looks forward to welcoming Marathon as operator and joint venture partner and hope that their vast experience with liquids rich resource plays will result in further value being added."

As of 9:42am Empyrean’s shares had increased 12.2 percent to 6.6 pence each.

Under the terms of the deal, Empyrean will pay 13.33% of the drilling and completion costs and 10% of all of the prospect costs to earn a 10% working interest in the prospect, covering all of the costs from its existing cash. Dry hole costs are expected to amount to US$607,000 for the final turnkey contract and prospect costs are approximately US$553,000, which would put Empyrean’s share at US$80,858 and US$55,300 respectively. The prospect costs have already been made to Krescent, which will be the operator, while the dry hole drilling costs are expected to be called in late January. Drilling is set to commence in February.

The prospect has a mean gross unrisked resource potential of 7.1 bcf (billion cubic feet) of gas equivalent.
Empyrean will also pay 13.3% of the drilling and completion costs for the Hercules prospect onshore Texas and 10% of all other prospect costs to earn a 10% working interest after signing a farm-out deal earlier this month.

Hercules, which is also operated by Krescent, has a mean gross unrisked resource potential of 21.4 bcf. Total dry hole costs are expected to be approximately US$715,000 for the final turnkey contract and prospect costs are approximately US$630,000, with Empyrean’s share amounting to US$95,350 and US$63,000 respectively.

Empyrean has focused on taking non-operating interests in prospects in the southern states in the US, while  Krescent Energy has become a regular source of farm-in deals for the company.

“We are again delighted to be working with Krescent on a further new project. These shallow prospects, although they are not as large a target as some of the other prospects that we participate in, are an appropriate mix of risk versus reward and balance out our current portfolio of projects very well… Once again we have targeted prospects of excellent technical merit that have a very short lead time to drilling,” said Director of Empyrean Energy Tom Kelly.

The Hercules Prospect is located north of the Theuvenins Creek and Highbaugh Fields. The well will be targeting the Upper and Middle Wilcox sands. The primary objective is in sand at a depth of 10,350 feet.

Drilling is expected to commence later this month.

Empyrean is paying 13.3% of the drilling and completion costs and 10% of all other prospect costs to earn a 10% working interest in the prospect.

"We are very pleased to have been offered the opportunity to work with Krescent on another project,” commented Empyrean Director Tom Kelly. “We hope to build on the good working relationship that is being built following drilling of the Quinn-3H well at the Riverbend Project. With testing preparations well underway at Quinn-3H and drilling to commence shortly at Hercules we are excited for the future of Empyrean."

Total dry hole costs are expected to be approximately US$715,000 for the final turnkey contract (Empyrean share $95,350) and prospect costs are approximately US$630,000 (Empyrean share $63,000).

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Quinn 3H, which is operated by Krescent Energy as is located on the Riverbend Project, onshore Texas, has now reached total depth of 16,641 feet.  Empyrean is earning a 10% working interest in the Riverbend Project.

The 5000 feet horizontal section of the well has also ceased drilling, after it was decided by the partners that the well had already encountered enough fractures in the target zone to commence testing.  “The number of fractures and gas pressures encountered generally compares favourably with successful longer horizontal wells drilled by operators to the north of the Riverbend Project area,” Empyrean stated.

Quinn 3H has already been connected to a sales pipeline to allow any gas produced during the completion phase to be sold.

Commenting today, Empyrean Director Tom Kelly said "Empyrean is excited to be commencing preparations to test the first well on the Riverbend Project. This project has an estimated recoverable hydrocarbon potential of 800 billion cubic feet gas equivalent. It will be interesting to see how the Quinn 3H well responds during the testing phase with a relatively short horizontal section."   

Even though the gas shows were “encouraging,” Empyrean said they required “extreme operational caution” and necessitate drilling to be momentarily stopped while the gas that has invaded drilling mud is circulated out of the well.

Krescent Energy Company, which operates the Riverbend project, has drilled the well to a measured depth of 16,383 feet from a vertical depth of 15,054 feet. The number and significance of the fractures have exceeded Krescent’s expectations for the footage of horizontal drilled at this point, Empyrean said in the statement.

These drilling results are currently being analyzed and no decision has yet been made as to how much further to drill ahead, however Empyrean said it was highly likely that the drilling of the planned 5,000 feet of horizontal would not be necessary.

The Quinn 3H well was spudded in early September after hitting multiple gas flares and showed in the primary target zone.

The Riverbend project covers about 40,000 acres under lease or option, while an area of mutual interest covers 50,000 acres. It is located in a highly prospective area for gas discoveries, being in proximity to two gas fields and the Austin Chalk and Saratoga Chalk plays, where high gas flow rates have been reported and which are targeted by the project.

Empyrean Energy holds a 10% working interest in the Riverbend project, which was acquired in June. The company agreed to reimburse Krescent for 10% of the land costs, which amounted to US$1.05 million, and cover 10% of the US1 million in drilling costs for Quinn 3H and 10% of the cost to re-enter the well and complete the horizontal section, estimated at US$0.3 million.

Empyrean will then cover 13.33% of the costs to earn a 10% interest in the second, third and optional fourth well before paying 10% of costs on those wells and any future wells drilled.

Shares in Empyrean rallied 20% on the news.

This work forms the first stage of the workscope required to be funded by Hilcorp Energy Co to earn its interests as per the recently announced farm-in deal.

Empyrean announced last month that TCEI successfully farmed out Block B to Hilcorp Energy, a private exploration and production company in the US. Empyrean's pre-farm-out working interest across Block B is 6 percent.

The wells will be stimulated using a fracture design that is based upon recent operations within the Eagle Ford  Shale trend as well as taking account of the specific nature of the Sugarkane field. TCEI has advised that the major part of the work program is likely to start in November 2009, subject to the availability of rigs and equipment.  In preparation for the fracture stimulation operations shallow water wells will be drilled and holding pits will be dug at each well location. This work has commenced at the Weston-1H well.

In addition, planning has commenced for a 2010 drilling program as part of the recently announced farm-in deal, with the first wells drilled in this program likely to be within Block B. Under the terms of the farm-out agreement all 3 new horizontal wells must have started by mid-2011 for Hilcorp to qualify for its full interest in Sugarloaf.

In addition to the Sugarloaf Block B wells, Hilcorp will also be involved in drilling up to 7 additional wells targeting the same play in adjoining acreage.

The operator signed a farm-out agreement with Hilcorp Energy Co, a private exploration and production company in the US, and field activities are expected to commence promptly. To date there have been four wells drilled and completed in Block B. Empyrean's pre-farmout interest across the block is 6 percent so that, when all farmout obligations have been completed, Empyrean will revert to 3 percent, the final working interest for all future wells drilled in Block B. Exceptions to this are the two wells Kennedy-1H and Kowalik-1H, in which Empyrean will hold a post farmout working interest of 9 percent and 10.2 percent, respectively.

Empyrean will be free-carried for the drilling, completion and tie in of up to three new horizontal wells and the stimulation of the three existing Sugarloaf horizontal wells: Kennedy-1H, Kowalik-1H and Weston-1H.

This will establish a total of six wells on production across Block B. Under the terms of the farm-out this work program has a series of deadlines over the next 20 months. No interest will be earned unless the agreed work programs are completed.

Hilcorp will earn an interest in Block B incrementally as each farm-in activity is completed up to a maximum of 50 percent of Empyrean's interest in Block B.

Empyrean executive director Tom Kelly said: “This farm-out ... achieves the stated goals of generating significant momentum for the project and allowing the acreage position to be actively managed. It gives Empyrean and its partners the best chance of unlocking significant value from the Austin Chalk and Eagleford Shale plays within the field.  In addition, it allows Empyrean to focus on its other high impact projects immediately.”

Hilcorp was founded 20 years ago and is now the 4th largest private E&P company in the US with operations based primarily in the Gulf coast region and Powder River Wyoming. The company is headquartered in Houston, Texas and has a demonstrated record of commercialising their investments. The company has an annual production of 15.8 mmboe of oil and a staff of over 600 professionals.

Empyrean Energy holds a 48.5% working interest in the project, which was previously operated by Victoria Petroleum USA, a former subsidiary of ASX listed company Vicpet. R&M, which will now operate Eagle Oil Pool after acquiring Victoria, is currently finalizing discussions with the joint venture partners regarding the acquisition of 20 square miles of 3D seismic over the project area.

At least two shallower zones of interest will be elevated in addition to the Gatchell Sands that are known to contain oil, the company said in the statement.

The Eagle North-1 appraisal well, which was spudded in 2006, was suspended later in the year after an unsuccessful perforation attempt and the project was halted in 2007. Victoria has since been trying to reduce its stake in the project and find a new operator, while Empyrean said it intended to participate in the drilling of a new well.

The Mary Bellocchi-1 vertical well located in proximity to Eagle North-1 tested at oil rates of up to 223 barrels of oil per day and gas rates 0.7 million cubic feet per day.

“The Eagle project has been in limbo for such a long time now. We are pleased that the team at R&M have acquired an interest in the project and we now have plans to move forward once more,” said Empyrean Director Tom Kelly.

The company added almost 3% on the news this morning.

The Quinn 3H well was spudded yesterday and is currently being conditioned and prepared for the drilling of the horizontal section of the well, the company said in the statement.

The Quinn 3H well previously encountered multiple gas flares and shows in the primary target zone and hit a very high pressure gas zone, which resulted in a blowout. The vertical section was plugged, but the final 1,000 feet of the horizontal section was lost. Krescent now plans to re-enter the well with a rig with greater pump capacity, designed to handle the higher gas pressures.

Now a 5,000 foot horizontal lateral is set to be drilled to complete the well in the Austin Chalk B zone.

The Riverbend project covers about 40,000 acres under lease or option, while an area of mutual interest totals 50,000 acres. It is located in a highly prospective area for gas discoveries, being in proximity to two gas fields and the Austin Chalk and Saratoga Chalk plays, where high gas flow rates have been reported and which are targeted by the project.

Empyrean acquired a 10% working interest in the Riverbend gas project operated by Krescent Energy in June. The company agreed to reimburse Krescent for 10% of the land costs, which amounted to US$1.05 million, as well as cover 10% of the US$1 million in drilling costs  for Quinn 3H and 10% of the cost to re-enter the Quinn 3H well and drill and complete the horizontal section, estimated at US$0.3 million. Empyrean will then cover 13.33% of the costs to earn a 10% interest on the second, third and optional fourth well before paying 10% of costs on those wells and any future wells drilled.

Empyrean jumped 8% on the London Stock Exchange following the release of the update this morning.

When Quinn 3H was previously drilled, it encountered multiple gas flares and shows in the primary target zone before hitting a very high pressure gas zone that ultimately resulted in a blowout.

Krescent took remedial action and was able to plug the vertical section of the well but lost the final 1,000 feet of horizontal. The newly contracted rig has higher pump capacity and pressure rating that is designed to drill in the high gas pressure environment and allow the partners to complete a lateral of desired length within the target zone prior to moving forward with completion operations.

The well has a sales pipeline already connected and upon successful completion of the horizontal the well will be flow tested direct to sales.

Krescent has begun mobilising the rig to the drill site, and a further announcement will bemade when drilling commences.

Empyrean announced at the beginning of June that it had entered into an agreement with Krescent to acquire a 10 percent working interest in Riverbend, which is located in a highly prospective area for gas discoveries. To the south of Riverbend is the Brookeland Field and to the south-east the Woodbine Field.  To the north and west, Anadarko Petroleum and Ergon Oil have reported exceptional flow rates from the Austin Chalk and Saratoga Chalk zones.

Empyrean noted that more than 30 drill locations had already been identified at Riverbend, and that Krescent has completed 60 square miles of 3-D seismic.

A few days after announcing its entry into the Riverbend project Empyrean said it has raised £724,000 before expenses, through an institutional placing with institutional investors, with the new funds be used for working capital and for the further development of the new project.

The new funds will be used for working capital and for the further development of the Riverbend project in Texas.

The placing shares equate to 9.9 percent of the enlarged issued share capital.

Executive Director Tom Kelly said: “The additional institutional demand and placing has allowed Empyrean to better prepare for a second well at the Riverbend project, following the completion and testing of the Quinn 3-H well. This substantially reduces the overall risk on the Riverbend project for Empyrean.”

Empyrean Energy was able to disclose the name of the operator after Conoco Phillips reported production figures for the month of March 2009 to The Railroad Commission (‘TRRC’) – the regulatory body that oversees oil, gas, coal and uranium operations in Texas.

Production figures show production from the Block A-1 Well, Block A-3 Well, Block A-4 Well and the Block A-5 Well. The fifth well, Block A-2, is awaiting production facilities. Total production from the 4 wells for the month of March was 15,621 barrels of oil and 113,693,000 cubic feet of gas.   Empyrean added that it did not know how many days of production each well contributed to the monthly total.

Tom Kelly, Executive Director of Empyrean Energy said he the company was pleased with the early production figures, “We are pleased with the early production, in particular from the horizontal wells A-1, A-3 and A-4. With the A-2 vertical well to come on to production and further work likely on A-5 vertical well, we expect that production will increase.”

Several stakeholders in Block B will be will be contributing equity to the farm-out effort, Empyrean said: “Empyrean will join some of the other joint venture partners in the Sugarloaf Project on Block B to contribute equity to this joint farm-out effort which will result in sufficient equity being available to attract a significant E&P company or investor.”

“It is envisaged that the incoming party will earn equity by carrying the farm-out parties including Empyrean through a drilling and well stimulation work program in a timely fashion. Details of the terms of any farm-out agreement reached will be advised at the time they are concluded,” Empyrean added.

The oil and gas junior was keen to stress that the outcome of marketing Block B would have no impact on nits interest in 5 wells on Block A, where work is expected to continue.

By farming out part of the equity stake in Block B, Empyrean is hoping to generate additional resources for its other work programs.

“A successful farm-out will give the best chance of unlocking the significant value for all partners that this major resource play offers. This will provide Empyrean with a solid platform for growth and the immediate relief from further Block B development expenditure, whilst production revenue builds, will allow us to focus on our other high impact projects and pursue other exciting opportunities,” said Tom Kelly, Executive Director of Empyrean Energy.

The foregone salaries will be converted to equity at the same price as the recent capital raisings at 3 pence a share. The amount of foregone salary totals £84,960 and along with the Company's £900,000 raised in recent placings puts the company in a stronger financial position to development its assets.

The conversion to equity will result in the issue of 2,832,000 new ordinary shares, around 2.94 percent of the enlarged issued share capital.

The company has also resolved to grant options over 3.7 million ordinary shares to its management.
The persons taking part in the salary conversion are: non-executive chairman Patrick Cross, commercial director Tom Kelly, technical director Frank Brophy and finance director John Laycock.

The company is issuing 8.33 million additional new shares at 3 pence each, and this money is also earmarked for the development at the Sugarloaf project in Texas and for general working capital.

The new placing shares equate to 8.93 percent of the enlarged issued share capital following all placings.
Tom Kelly, commercial director and Frank Brophy, technical director, both participated in the latest placing, subscribing for 2 million and 166,666 shares respectively. Kelly now holds 5.5 million shares, representing 5.89 percent of the shares in issue, and Brophy’s 166,666 shares represent 0.18 percen.

Kelly commented: “This is the third issue of equity that Empyrean has announced over the past few days, with an aggregate total of £900,000 raised. It is pleasing to have been able to raise these funds in such challenging times. Some of the funds will be used to bring existing drilled wells into production and the company is in a materially better position to achieve this aim.”

The company is issuing 11.66 million additional new shares at the same price of 3 pence a share with institutional investors, and this money is also earmarked for the development at the Sugarloaf project in Texas and for general working capital.

The new placing shares equate to 13.73 percent of the enlarged issued share capital following both placings.