Happy Friday folks,
It really can feel like we’re moving forwards at a snail’s pace at times. Many cite frustration at having been here for multiple years, but it does take time, and a bit of luck, to build a profitable company. We only started 4 years ago in Alaska which in “company building" timeframes is not long. And unfortunately given the nature of E&P it is high risk meaning statistically we are likely to have more failures than successes.
I like these boards as they are (largely) informative, and they challenge my pre-conceptions on my investments which I find healthy. Many continue to state the Board have not delivered, and given we’ve not succeeded to deliver a barrel of oil that the company is failing. So I’ve been through the operational and financials since early 2015 (warts and all) to challenge my view (which was, and still is, that neither the Board or the company are failing, but building value which is yet to be reflected in the share price).
Here’s the summary from when we embarked upon our Alaskan adventure vs. where we are today 4 years on, on the cusp of a FO deal with a “Tier 1” player. Hope it helps.
As of March 2015
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Mcap: GBP5.6m
Shares in issue: 1.12bn
Capital raised: GBP3.8m (Feb 2015)
Debt: GBP0
Cash: GBP3.5m
Tax Credits: £0
Net Assets: GBP4.2m (approx.)
Net 88e Acreage: 85,909 acres
Net Unrisked Unconventional Mean: 431MMBO
Net Unrisked Conventional Mean: 0MMBO
End Q1 2019
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Mcap: GBP49.1m (+777%)
Shares in issue: 6.331bn (+465%)
Capital raised since March 2015: GBP59.8m
Debt: GBP11.9m
Cash: GBP7.7m (including £0.93m bond to be returned)
Tax Credits: GBP14.8m
Net Assets: GBP51.3m
Net 88e Acreage: 371,000 acres (+331%)
Net Unrisked Unconventional Mean: 800 - 2,000MMBO (on 73% acreage) (+85% - 364%)
Net Unrisked Conventional Mean: 2,290MMBO (25% acreage with 3D seismic, incl. Yukon)
Operational:
- IW1: Successful Well
- IW 2D Seismic acquisition and interpretation complete
- IW Western Flank 3D Seismic acquisition and interpretation complete
- IW2: Failed to flow (debatable if full failure or not)
- Winx-1: Failed well
- Yukon Seismic acquired interpretation underway
- Conventional FO nearing completion
- Unconventional FO being prepared
Agreed Spinefx,
I would say the Quarterly does supercede the Annual, although the statement re: the 2020 drill and FO is a bit lazily written - or is deliberately trying to be opaque given the commercially sensitive nature of the negotiations and the desire to give zero away.
The annual report statement added a bit of credible context (for me anyway).
Just re-reading the annual report, per the debate the other day re: a singular well in the FO, and things may have progressed in discussions, but from the Annual report it is clear that the intention is to drill multiple wells next season.
"The level of interest and the quality of parties in the Project Icewine Conventional farm-out data-room was highly encouraging, with 88 Energy deciding in December 2018 to honour requests for an extension to the year-end deadline in order to maximise the number of bid ready parties, whilst also remaining within the logistical schedule necessary to drill multiple wells in the 2020 operating season."
Page 12 http://clients3.weblink.com.au/pdf/88E/02079648.pdf
Worth noting that 56% of stock is with non-PIs - so huge % in sticky hands.
http://www.blockenergy.co.uk/investors/
Good interview.
Doubled Georgian production with 1 well.
Need to export oil as too much for refineries in country to handle
Up to 1200 bopd seen
3 more similar wells to bring on line
Slight difference in monthly free cashflow than reported in RNS (3m 35) at 700 barrels per day he states $750-800k FCF per month or $10m per annum. Not sure if he got his currencies mixed up....
RP has 12m shares.
When this was 30p per share his investment was worth £3.6m.
At today's price his investment is worth £1.02m.
His salary is tiny relative to the reduction in the value of his shares. Unless he has a strange desire to be poorer, I am pretty sure he does "give a monkey's" about shareholders given he is the biggest one.
Hi CBS,
Not perfect analogues, but interesting. There is the FO that Armstrong Repsol conducted which was $768m to Armstrong, but seeing as they are private company no impact on Mcap/Shareprice evident. See slide 18 here http://clients3.weblink.com.au/pdf/88E/01636733.pdf
There is a case study in one of the very early presentations (http://clients3.weblink.com.au/pdf/88E/01610837.pdf slide 6) which shows Aurora Oil and Gas farming out to Hillcorp, and subsequent share price appreciation. This was for free carry on a 10 well programme in return for 50% WI (once farmer had recouped costs). It's difficult to see precisely how the company rerated at the time as no longer public (bought out for $2.4bn), but in the year after the FO was announced it did 1000%.
I'm not going to speculate on where the price may get to, but for me the price catalysts from the FO will be:
1) if the Farmee is a big brand major - this first round of FO discussions was targeted at "Tier 1", with intent to move down the pecking order and open up to others if no Tier 1 found. The information we have suggests this is still the case.
2) linked to 1), but a major would add credibility to the analysis we have so far, de-risking the potential if you like and creating more belief in the market
3) Any money received for back costs of exploration so far to go straight onto the balance sheet
4) Commitment to future drill programme, the number of wells and the amount of free carry we receive
5) Commitment to future 3D seismic execution, and the amount of free carry we receive
6) The amount of WI we need to give away for all off the above
With regards to the statement "the intention to drill an exploration / appraisal well in 2020" from the recent update, I would be disappointed if this is going to be a one well programme. A well costs approx. $15m, so all this effort and time for that, and giving away WI seems like a poor result, and I struggle to believe that a single well FO is our intent. It also seemed at odds to what has been stated in the past about what DW is looking for from FO (which is aligned with my points above).
Maybe I'm being blinkered, but my interpretation of that statement is slightly different. I take it as a statement of when the next well will be drilled of the back of the FO agreement, NOT the full extent of the FO. And yes, if this is the case it could have been better worded.
Hi E.T.
Sorry if my post was confusing - the point I was trying to make in response to yours was:
I think it's unlikely we'd drill the horizontal prior to the planned Unconventional FO even if we did get some money from the Conventional FO.
Both September presentation and AGM presentation seem to support this, with all future Unconventional development to be funded via FO.
If we did want to drill on our own with money from the Conventional FO and current cash, then it would make sense to do that prior to Unconventional FO as the success case would give us more leverage in the negotiation.
Hope that's clearer :-)
Thanks Phrontist,
From a company I'm invested in with wells in Colorado, the timings to get from drill to IP for 2km horizontals are approx:
Drill - 2 weeks
Frack - 3 weeks
Flowback - 4 weeks
I guess critically, what's hindered our HRZ progress the most was that decision to go vertical. Taking two attempts to get it to flow over two springs vs. attempting horizontal 1 (upper zone) in 2017 and then if unsuccessful, horizontal 2 (lower zone) in 2018 which would maybe have us with oil now. That said, hindsight is a powerful thing, and armed with all the data and expertise PB and the team had, they still went with the vertical.
This does require extreme patience, and I do appreciate your frustration and perspective. We're so close to:
1) Conventional FO news
2) Baker Hughes analysis update
3) Unconventional FO
4) Possible HRZ drill in H2 if we get 3 away
The next few months are going to be exciting, and possibly the transformation we've been promised.
E.T. - Quite possibly. But then the timing of the FO for HRZ doesn't quite make sense to me. You'd want the results from the drill prior to completing the FO surely?
Slide 7 in this deck from September ( http://clients3.weblink.com.au/pdf/88E/02020953.pdf) suggests the next drill is targeted for Q3 this calendar, and is subject to Unconventional FO completion (also reiterated in AGM update), which we know from last update is targeted for completion in H2. Not impossible to close out HRZ FO by end of July to allow the drilling as per this plan, but seems a tad optimistic. But then again the data room has been open for a while, and the final piece of data to go in from Baker Hughes is being integrated so maybe the Farmees are already close and just need the final data. Maybe we're going to have a very exciting Summer/Autumn.
Great post Phrontist,
Which for me strikes at the heart of the debate I think we're having.
Is a singular focus on HRZ with (arguably) more "eggs in one basket" risk and smaller but potentially faster returns better for the short, medium and long term health of 88e and the share price
Or
Is a diversified portfolio with less focus on HRZ and (arguably) less risk but potentially slower bigger returns better for the short, medium and long term health of 88e and the share price?
The thing we don't know is how much faster, if at all, the HRZ development could have gone if we did adopt singular focus - your assumption is that the distraction of the other projects has caused material impediment.
If we assume that the decision to go vertical remains (as this is not a function of focus), and you assume that we also need the appropriate amount of time to analyse the results from each well prior to executing the next phase of drilling. When do you think we could have drilled the lateral at IW2 (if we ignored all other projects)?
In your singular focus strategy, I do still think the land acquisition strategy is the thing to do, even if seismic etc is put on the backburner. We had one shot to get the land without the ability to ever get it again unless the lessee gives it up or there’s a GB style fire sale. The last thing we would want is to hit the motherlode and realise that 50% of it is sat under the piece of land next door that we could have bought in the last auction.
I agree with all your observations on the HRZ analysis, and remain positive also.
I guess one question is why, given all the positive analysis (we believe), are we going to farmout of the HRZ in H2 rather than drilling a lateral for IW2?
A bit of a tangent, but after the discussion yesterday and the topic of Eagle Ford, I spent a little time familiarising myself with the story. I was keen to see what, if any parallels I could draw to indicate positives of negatives from our own progress.
I found the story quite fascinating, reassuring and inspiring with a number of similarities to our own journey.
An independent geologist with a hypothesis (Gregg Robertson) through a friend's intro met with a Oil E&P company (Petrohawk) to from a partnership. They bought up low cost land few were interested in at the time (150k acres), drillied 2 wells in 2008 that confirmed the discovery (Gas initially) and led to major development of the field. Big difference being that the first two wells they drilled were horizontal, flowed gas and were put into production. We're clearly not there yet, but as per the discussion yesterday - that horizontal drilling may be the step that unlocks the HRZ.
https://www.rigzone.com/news/oil_gas/a/68125/petrohawk_discovers_shale_gas_field_in_south_texas/
I guess the most startling fact is that it took only 10 months to go from the first idea to the discovery which is astonishing.
Anyway, for interested folk, these were the most interesting for me:
https://www.houstonchronicle.com/business/article/South-Texas-geologist-led-the-way-to-the-Eagle-3040998.php
https://craveyrealestate.com/ns/wp-content/uploads/2011/06/The-Wildcatter_-Corpus-Christis-Gregg-Robertson-key-member-of-Eagle-Ford-discovery-named-2012-Newsmaker-of-the-Year-»-Corpus-Christi-Caller-Times-Mobile.pdf
https://stedc.tamucc.edu/files/Robertson.pdf
Thanks Mikemike,
I agree the Conventional was a secondary objective to the HRZ.
I disagree that it wasn't an objective from the outset, or that specific activity to identify conventional prospectively was not part of the original plan. It's clear through the documentation that conventional has always been a target in it's own right versus being purely "incidental strikes" whilst drilling for unconventional.
Maybe I'm being pedantic, but that's the point I am trying to make, as it reaffirms the BoD are focused, on point and executing the initial stated strategy as outlined in the doc Brom posted and the one I did.
Mikemike,
You're absolutely spot on with your 2D/3D statement. But my point was more that Conventional prospecting should not be seen as random or a move away from our strategy. It was always part of the plan. It's worth reading through the early presentations - it is clear that the Alaskan investment thesis was based on both unconventional and conventional. See slides 8,9,13 and 15 in the very first 88e presentation from March 2015. Whilst we had no confirmation of any conventional prospects back in 2015, the intention was always to investigate, including shooting of 3D seismic. An important clarification as it proves the company is still executing it's intended strategy versus going "off piste".
http://clients3.weblink.com.au/pdf/88E/01610837.pdf
My point re: experts was referring the people from Baker Hughes analysing the data right now in order to better understand the characteristics of the HRZ prior to moving forwards.
And thanks for reposting the Q&A - I could find the data to re: the decision to move to vertical vs. horizontal. which is in this Answer from DW:
Q Given that the team employed to advise and vertically frack have not succeeded in communicating with the reservoir is there a case for fresh minds being employed for the horizontal?
A The team employed to design the frac did not recommend a vertical – that was largely driven by Paul due to the uncertainty we had about the upper HRZ (88 agreed with Paul on this – in hindsight we probably would have made a different decision).
...
Finally, I respectfully disagree. I can say diversification has derisked us. We have more opportunities for success than we had, and therefore our risk is now spread across multiple prospects versus a single prospect. In my mind the very definition of derisking. I also do not believe we are on our knees. Our balance sheet is strong, our assets are huge, we are in an exciting phase of our growth. Our share price is woeful and it hurts, but if you believe in the underlying fundamentals of what we have, and can afford to remain invested, then whilst the current share price is not pretty, believe in your research and believe in your investment hypotheses. If your research no longer stacks up, and your investment hypotheses no longer seem valid, then staying invested would be the wrong thing to do as you'd surely expect the share price to fall further.
Good to debate Phron
Thank you
I think the conventional was opportunistic. But I also think it was prudent to understand if we had conventional prospects on our acreage. Our acreage, I would argue, is worth more with the conventional prospects we have identified than without. To me that has increased our underlying asset value - whether the share price reflects it at this moment in time or not.
The reason I ask about which horizontal layer, is because that is exactly the question BEX/88e asked of ourselves, and better qualified and likely smarter people than me got to a decision based on the data to go with the vertical. The problem we had was that the unknown of the geology hit us when we realised the two zones were somehow connected and the specific gaseous properties of the lower seem to have interfered with oil flowing from the upper. Who knew?
Re: Icewine 2 being zero risk, I think I would add to that - we know that there is oil there (so I agree the risk of there being no oil is low), the risk factor here is about how much money we need to spend getting it to flow commercially - and whether the specific geology and chemistry of what we have can indeed flow commercially. And yes Eagle Ford has been pulling unconventional for 30 years, but this isn't eagle ford, the geology is different and therefore the formula for extraction is different. So for me, and I believe we will crack the conundrum, it is not zero risk.
There's only so much effort and expenditure we can put on the HRZ, and there is a point at which you reach the point of inflection and have diminishing returns. Would I rather we let the appropriate experts analyse all the data prior to spending another $XXm on a well, to be confident of a) the ability to generate commercial flows and b) make sure we have the optimal design of well? Yes, I think I would. And given the backlash DW got after IW2 and the subsequent impact to share price, I can understand why he would want to be as sure as possible. So I don't think Winx, or Conventional has slowed HRZ. I think the critical path for HRZ is driven by the current Baker Hughes analysis.
And whilst all that is going on, if we have the manpower and financial ability to add 2.2bn barrels of conventional prospects to our asset sheet from land we have already acquired (which are neither random nor unqualified) without impact to the progress of the HRZ - then great. If you are talking about Winx-1, I can see your argument more, however I would love to rewind the clock and ask all shareholders to vote "we have an opportunity to drill for 36% of 400m barrels for %40 of the drill - or $6m for a shot at 144m barrels adjacent to the Horseshoe discovery. What would you like us to do?". I suspect many, myself included would have said go for it.
...
Hi Phronist,
Would you have gone with a horizontal on the upper or lower zone?
And if neither flowed, what then for the share price with no other “eggs in our basket”?
I also wonder why other operators decided to refocus on conventional after starting on unconventional? Lots of material to suggest it’s due to the significant cost associated to develop unconventional vs that of conventional (and also the risk profile of getting unproven unconventional prospects to flow versus a big old conventional reservoir). Proving up and generating cash from conventional to then be able to better finance unconventional seems like a good strategy to me. And not one you can have until you understand whether there is any conventional hence why it maybe wasn’t stated from the outset?
I’m not sure why everybody believes 88e took the decision to go vertical? Is this documented? It was clear when I spoke to DW it was PB’s decision largely based on mitigating the risk of choosing the wrong zone to go horizontal on. A hedge if you like. If I have this wrong, happy to be corrected, but given the data we had I fully understand the decision. If we’d have picked the ring zone what then?
Doesn’t feel like diversification for the sake of it to me. Feels like diversification to derisk our company, and fully sweat the investment we have made in our leases with the drill bit planned to be turning in less than approx 9-10 months in the next drilling season.
I personally am OK with taking a little longer to get to the money, if the size of the prize is bigger and less risky. Where I have less patience is where I see companies squandering cash with little progress on increasing the underlying fundamental value of the business.
All IMHO and happy/glad for the debate as that’s what helps us get robust views on our investments.
My interpretation of the RNS is that we are financially stable, have enough funds to see us through until the end of the calendar year and beyond should initial farmout not come to fruition, and with tax credits on the balance sheet exceeding debt to the tune of US3.5m looks good (obviously just need paying).
My takeaways beyond FO detail which is not new:
1) continued commitment to unconventional FO - suggests Baker Hughes analysis has not disproved HRZ hypothesis
2) looks like Yukon analysis is not complete - 3D inversion analysis underway - more upside? - apologies Danielson/Brom I was incorrect yesterday.
3) US$2.35m cash credit received brining cashable tax credits US$19.1m
3) cash and cash equivalents A19.596m (US$14.03)
4) Debt US$15.405 (US$600k per quarter repayments)
5) Q2 budget - A6,980 (US$ 5m) leaving us with US$9m for H2 against our cash balance.