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E M A I L a d m i n @ e m p i r e o i l . c o m . a u

W E B w w w . e m p i r e o i l . c o m . a u

11 September 2014

The Manager

Company Announcements Office

Australian Securities Exchange

20 Bridge Street

SYDNEY NSW 2000

Empire answers commonly asked questions about its strategy to unlock the value of its extensive Perth Basin acreage holdings

A L I A

Empire Oil & Gas NL (ASX: EGO) is pleased to provide some responses to commonly asked questions about its strategy to unlock the value of its extensive acreage holdings via its proposed transaction with ERM Power.

Yours faithfully

Kent Quinlan

Company Secretary

11 September 2014

Empire answers commonly asked questions about its strategy to unlock the value of its extensive Perth Basin acreage holding

"For Empire shareholders, the plan to buy ERM out of our permits and strengthen our financial position is stage one of a two-stage process. The second stage will involve securing high-quality farm-in partners and investors to underpin an aggressive exploration strategy. We are confident that this process will maximise our ability to create wealth for shareholders." - Empire Oil & Gas Chairman Tony Iannello.

In response to requests from shareholders, Empire Oil & Gas (ASX: EGO) is pleased to provide answers to commonly asked questions regarding its plan to unlock the exploration value of its vast Perth Basin acreage holding via its proposed transaction with ERM Power announced on 1
September 2014.
The underlying strategy of the proposed transaction is relatively simple and has one key objective: to maximize Empire's ability to create wealth for its shareholders by discovering more gas and oil on its acreage in the Perth Basin.
To achieve this goal, Empire believes it is crucial that it owns, where possible, 100 per cent of its permits and its Red Gully gas and condensate project.
This is why Empire proposes to buy ERM Power out of the pair's joint ventures. By increasing its ownership and, in most cases, owning 100 per cent of these permits, Empire will be in a much stronger position to attract high-quality farm-in partners and corporate investors to fund an aggressive exploration campaign across its permits.
To take full advantage of this significant exploration potential, Empire needs to ensure it can meet its minimum expenditure requirements on each of these permits while it seeks high-quality farm-in partners or corporate investors. If Empire is unable to meet these expenditure requirements, it may lose the permits.
To ensure it has sufficient funding to meet these minimum expenditure requirements, Empire proposes to place shares worth up to $7.5 million with ERM through a placement and subsequent rights issue. This will lift ERM's stake in Empire from ~10 per cent to a maximum of 19.99 per cent.
Empire Chief Executive Ken Aitken said Empire believed strongly that the buyout of ERM as a joint venture partner and the strong financial position which the Company would enjoy as a result of the placement and subsequent rights issue would set up Empire to take the maximum possible advantage of its highly prospective acreage in the Perth Basin.
"Unlocking the exploration potential of this acreage is the most effective way to maximise value for shareholders," Mr Aitken said. "To achieve this, Empire believes that buying out ERM and strengthening the Company's financial position is crucial.
"To help explain this strategy and the transactions behind it, I am pleased to provide the following answers to the questions being posed by our shareholders. I hope this helps explain why I believe this deal is so important in enabling Empire to achieve its objectives."

Question. The deal seems quite complicated. Can you explain the key points in simple terms?

Answer. The key pillars of the deal are actually quite simple. Essentially, Empire will buy ERM out of the pair's joint ventures in the Perth Basin and one additional tenement wholly-owned by ERM. Empire will also buy ERM's stake in the Red Gully gas and condensate project. Empire will then raise up to $7.5 million from ERM by issuing shares to ERM in a share placement and ERM's participation in subsequent rights issue (which is conditional on completion of the buy out and ERM placement). All Empire shareholders can participate in this $10m rights issue. The ERM buy out and the share placement both require the approval of Empire shareholders. An Independent Expert's Report must also find that the transaction is fair and reasonable to Empire shareholders in order for it to proceed.

Question: Why does Empire want 100% of these permits? Isn't that increasing the Company's risk?

Answer: Buying out ERM is the first step in a two-stage process. Empire needs to hold 100 per cent, or at least as much as possible, of these permits to maximise its ability to attract the best possible farm-in partners and corporate investors to fund an aggressive exploration campaign across its acreage. The exploration campaign will effectively be the second stage of this process and is the part which stands to create the value for Empire shareholders. The buyout is a means to that ends.

Question: ERM will have up to 19.99 per cent of Empire. Is ERM's strategy to remain just below the takeover threshold and then make a bid at a later date?

Answer: Empire is certainly not aware that ERM has any intention to take over Empire. ERM has stated in their announcement on 1 September that this transaction will allow them to focus on their highly successful electricity retailing and generation business. However, it is always open for almost any company to make a takeover bid for an ASX-listed company.

Question: Empire is paying ERM $16.34m for its share of the joint ventures. How did Empire arrive at this figure and is it too much?

Answer: Empire, like all ASX-listed companies, has to value its assets. In this case, the price being paid to buy out ERM merely reflects ERM's share of the joint venture assets based on their approximate total valuations. The appropriateness of these valuations will also be examined by the Independent Expert as part of their report. That report will opine on whether the deal is fair and reasonable to Empire's non-associated shareholders. Empire shareholders will be provided with the Independent Expert's findings before being given the opportunity to vote on the deal.

Question: Will ERM retain any direct interests in any of the WA tenements after this transaction, or retain any farm-in arrangements?

Answer: No, Empire is purchasing all of ERM's interests in its WA tenements. The current farm-in arrangements between Empire and ERM in EP 432 and EP 454 will terminate on completion of this transaction.

Question. Will ERM use its stake to vote on resolutions at the meeting in its favour?

Answer: ERM cannot vote on the shareholder resolutions to approve the ERM buy out or the ERM
placement.

Question: ERM stands to receive a "top-up" payment in addition to the $16.34m. How would this be calculated and will it burden Empire with too much debt?

Answer: The top-up payment mechanism exists purely to ensure that the price ERM receives for its relative share of the Perth Basin assets reflects in part any substantial exploration success enjoyed on this ground. This arrangement means that rather than Empire paying at the outset a higher price which reflects the prospect of exploration success, Empire only pays an increased price if the exploration success eventuates and that success is reflected in Empire's share price. This increased price would be paid via the top-up mechanism. The arrangement effectively reduces the risk for Empire because the final price is linked to Empire's share price movement.
Under this mechanism, Empire will increase the amount it pays to ERM on top of the $16.4 million by a percentage equal to 70 per cent of the percentage increase in Empire's share price. For example, if Empire's share price increases by 50 per cent, Empire will increase the amount it pays to ERM by 70 per cent of 50 per cent, or 35 per cent. This would result in an additional payment to ERM of $5.7 million. This means that the final amount ERM receives from Empire for these assets is closely aligned to Empire's success.

Question: Why didn't Empire conduct a tender process to see who wanted to farm into the permits before agreeing a deal with ERM and allow ERM to sell its interests that way?

Answer: Empire has an obligation to its shareholders to maximise the value of its permits. Empire believes strongly that its ability to do this is much greater if it owns 100 per cent, or as much as possible, of the tenements to attract interest from potential high-quality farm-in partners and corporate investors. Empire also believes it was an important opportunity to secure ERM's interests in these permits rather than run the risk that ERM sell them to a third party which may have further complicated the joint venture ownership structures.

Question: How much will Empire raise through the placement and rights issue?

Answer: Empire will raise a maximum of $17.5 million through the placement and subsequent rights issue. ERM has committed to provide up to $7.5 million of this, while not increasing its Empire holding above 19.99%.

Question: Why does Empire need to raise this much money?

Answer: As Empire's June 2014 Quarterly report shows, revenue from condensate sales at Red Gully is barely enough to pay the ongoing bills, when the plant is running consistently. Empire receives no money from the delivery of gas to Alcoa under the current Tranche 1 sales agreement because Alcoa paid for this gas upfront in 2011 through to 2013. To help pay its bills in recent times, when the well and plant performance were below expectations, Empire has borrowed limited funds from ERM. The proceeds from the raising will enable Empire to repay that debt and will provide the Company with working capital while it advances its exploration strategy, including discussions with potential high- quality farm-in partners and corporate investors.
Empire also needs funds to meet the minimum expenditure commitments on its permits. Under WA law, the Company risks losing permits on which it fails to meet the minimum exploration expenditure requirements. Failure to meet these spending levels could significantly damage the Company's asset base and its ability to create value for shareholders through future exploration.
Empire will also allocate some of the money to exploration in addition to meeting its minimum expenditure commitments.

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