New FinnCap note out...26 Apr 2021 08:34
“Chinook and Cascadura Deep testing update
The recent disappointing Chinook-1 test results hit TXP shares hard. These test results look anomalous when compared with the others on the Ortoire block, for which there may be a number of reasons. As such, we think it is far too early to write Chinook off. Touchstone has returned to form with Cascadura Deep-1 delivering excellent well test results, confirming a liquids rich natural gas discovery. We have remodelled Chinook as a small oil development to define a downside valuation, and have also incorporated the Cascadura Deep-1 test results into our modelling. All told, our risked NAV and price target fall from 191p to 163p, largely due to the lower Chinook valuation, which may prove too conservative once the test results are better understood.
?Chinook testing disappoints, but don’t write it off yet. Recent testing of Chinook- 1 well was disappointing, with the results suggesting the structure oil, rather than gas, charged. More concerning was the low flow back rates encountered on testing, especially when compared with the prolific Cascadura well just 1.5 km away. The market reacted aggressively, with the sell-off suggesting Chinook has been totally written off. There are a number of possible explanations for the poor Chinook-1 test result – heavy mud weights may have caused reservoir formation damage, the reservoir may be tight, or faulting not evident on seismic is present. A forensic analysis is underway and it is far too soon to rule out a commercial discovery.
?A return to form with Cascadura Deep-1. Testing of the lowermost section of the shallow overthrust Herrera sand in Cascadura Deep-1 has confirmed a liquids rich natural gas discovery, with the well averaging 4,262 boepd (89% gas) on test. While not quite the screamer that Cascadura-1TS1 was, this is still an excellent result that should restore confidence in Touchstone’s equity story.
?Chinook downside valuation. Previously, we modelled Chinook as a 35 bcf gas field, valued at 32p within our risked-NAV. Following the test results, we have re- modelled Chinook as a small oil discovery to provide a downside valuation. Low drilling and development costs mean that small accumulations can still be highly economic. Maintaining a 75% risking our Chinook valuation drops to 6p/sh. As Chinook test results become better understood, this may well prove too conservative. We have also remodelled Cascadura Deep based on the test results and removed our geological risking. All told, our risked-NAV and price target fall from 191p to 163p due primarily to the lower Chinook valuation. The final well in the current programme, Royston-1, remains on track to spud next month and is expected to take ~60 days.”
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