Is it worth getting on the Winx rollercoaster ride?
Investors in Red Emperor Resources, 88 Energy, and Patheon Resources have been sent on something of a rollercoaster ride over the last week. Following a much-hyped run-up to drilling, the businesses have delivered mixed results from their joint-owned Winx-1 exploration well in Alaska. This has led the price of all three firms to swing violently. Here, we recap what has happened and look at whether a buying opportunity remains.
Winx is a 3D seismic-defined, oil prospect located in the Nanushuk play fairway on the North Slope of Alaska, one of the largest conventional oil fields discovered in the US in more than 30 years. The well has a gross mean unrisked prospective resource of 400MMbbls and a geological chance of success of 25-35pc. It is adjacent to the Horseshoe 1/1A discovery well drilled by an Armstrong/Repsol JV in 2017.
The licence containing the well is operated and 36pc-owned by 88 Energy, while Red Emperor also holds a 31.5pc position. Pantheon Resources, meanwhile, owns a 10pc stake with a back-in right to a further 10pc.
The primary objective of the well is the Nanushuk Topset play, where the partners are targeting the Nanushuk 4 and 5 sands. After regular RNS updates about the progress of drilling preparation, drilling began at Winx last Tuesday.
On Friday last week, all three of the Winx partners took a major hit following the release of an interim drilling update for the well by 88 Energy.
The business said it had observed oil shows while drilling in the Nanushuk play. However, it added that a preliminary review of the interval suggested that the zone between 4,460ft and 4,530ft where the shows were encountered was at the ‘lower end of the range required for commerciality’. The target now remains subject to further analysis to determine whether it offers any prospectivity. What’s more, 88 added that no oil shows had been recorded in the shallower secondary target, which was called the Seabee turbidite.
Despite the firm saying that the forward plan is to continue drilling ahead to target depth and test the deeper objectives, many investors rushed to the door fearing they had pumped their cash into a duster. Red Emperor sank by a whopping 64.5pc to 1.42p, its lowest price in more than half a year. Meanwhile, both 88 Energy and Pantheon were down by more than a fifth to 0.8p and 19p respectively.
For those investors that did not throw in the towel straight away, things were looking much brighter again on Monday. Indeed, 88 informed the market that it had now intersected the primary Nanushuk targets between 4,667ft and 4,901ft.
In a positive turn of events, the company said it recorded elevated mud gas associated with oil shows in multiple topset features within this interval. When compared to data from a nearby successful third-party well on the Nanushuk, the firm said that this initial interpretation was encouraging.
It added that it also encountered elevated mud gas readings and oil shows at another secondary target called the Torok Topset Sequence 4, which it intersected at 6,052ft. Once final depth has been reached at Winx, a comprehensive wireline logging program will be completed to evaluate all the zones of interest and decide whether to go on with production testing.
Following the results, all three partners saw their share prices bounce. Red Emperor led the pack with a 151pc leap to 3.6p while 88 Energy followed with a 15.2p jump to 0.9pc and Pantheon rose 9.9pc to 20.9p.
Although the new results are promising it is worth exercising some caution. First-of-all, despite the jump, all three businesses remain below the price at which they sat before last Friday’s fall. In this sense, the only big winners over this highly short-term basis are those who invested in one of the Winx players – particularly Red Emperor – on Friday following the decline.
The importance of a stock’s day-to-day share prices depends largely on your investment horizon, of course. However, for those who held one of the firms in the hope that a discovery would make them a quick sentiment-driven buck, the initial disappointment has reduced the impact of Monday’s potentially-positive news. This may change. After all, it is early days, and some continued, big news may see these punters bag their profit yet.
However, this is far from the reality of the situation as it stands. Aside from the fact that the well – like all exploration wells – has a modest chance of success, all parties involved have themselves been quick to remind investors not to read too much into Monday’s results.
Indeed, 88E managing director Dave Wall said: ‘There are early signs of encouragement at multiple horizons in the Winx well; however, it is too early to say whether these will result in a commercial discovery at this stage as more data and analysis is required. The forward program, to be implemented over the coming days, is designed to improve confidence in the interpretation and assist in the decision to proceed with production testing, if appropriate.”
Likewise, Jay Cheatham, CEO of Pantheon, said: ‘I am very encouraged by today’s news, however, would caution that additional data and analysis is required before we can make any definitive assessments on the Winx-1 well. The forward programme is to now complete logging and other technical analysis in order to provide as much information as possible to assist in determining whether production testing is warranted.’
Meanwhile, Red Emperor did not provide a quote but included the following line in its RNS: ‘These initial observations and interpretations, whilst encouraging, should be treated with some caution as additional data and analysis are required for further assessment and validation.’
So, while many will be pleased to see that Winx may not be the write-off early indications had suggested last Friday, the firms involved are far from out the woods yet.
With much of Friday’s losses recovered, existing investors may want to ask themselves: ‘Does the well still present the same opportunity they thought it did before drilling began?’ New investors simply need to ask: ‘Do I think it is worth entering at this level on the basis of the well’s target resource and the quality of recent drilling results?’.
If it the answer, in either case, is ‘yes’, then the results of the additional data and analysis being carried out on the initial promising shows could be a real dealbreaker for all involved.