The Pure Exploration Business Model
ERHC Energy is implementing a pure exploration business model. We carry out oil and gas exploration in sub-Saharan Africa. Our oil and gas exploration licenses and operations are situated in Kenya, Chad, Sao Tome and Principe, and the Nigeria-Sao Tome and Principe Joint Development Zone (JDZ).
The object of the pure exploration business model is to explore for and find significant oil and gas reserves and then to sell the oil found or the company for significant value for the benefit of the company's shareholders. ERHC is not in the business of producing oil and gas.
We have identified three distinct steps in executing the pure exploration business model:
Step 1: Acquire
- Acquire early stage exploration assets, which typically have low entry costs.
Step 2: Build
- Develop prospectivity of the acquired assets through geological and geophysical (G&G) work, reserve estimates and drilling.
- Realize increased valuation of the acquired assets.
Step 3: Sell
- Sell assets or sell company for significant gain prior to drilling or upon discovery.
The value proposition for exploration companies is that exploration work programs inherently build value in exploration assets. As more becomes known about the prospectivity of an asset through the hard work of acquiring and analyzing gravity studies and seismic surveys, anticipation of drilling builds interest and demand, which in turn builds value.
Ultimately, the objective of the exploration phase depicted above is the drilling of successful wells. An exploration company that achieves a significant commercial discovery often sees its valuation increase accordingly.
This is the point at which ERHC's business model differs greatly from the major exploration and production (E&P) companies with which many are familiar. As a pure exploration company, ERHC does not intend to develop its oil assets after a discovery. ERHC does not intend to produce oil. ERHC intends to sell the asset or the company itself.
In some cases, ERHC may sell all or a portion of an exploration asset prior to drilling. ERHC has done this in the JDZ, the Sao Tome and Principe Exclusive Economic Zone and in Kenya. In all cases to date, ERHC has retained interests so the company and its shareholders can financially benefit in the event oil is produced in commercial quantities.
There are several salient points to understand about the pure exploration model:
There is no cash flow until the sale of an exploration asset or company.
Equity is the sole source of capital. The company's operations are funded from the sale of equity in the company and its licenses. Exploration work typically contributes to a rise in valuations of the company and its licenses.
Value is built over time through execution of a predictable process of asset prospectivity development.
The model is high risk. There is no guarantee of commercial discoveries, which is why ERHC has diversified its portfolio of exploration assets to include onshore and offshore oil blocks in Western, Central and Eastern Africa.