No debt and cash in the bank. So is 88 Energy worth a punt?
“…The first two exploratory wells disappointed, halving the company’s value. But with money remaining in the bank, and new prospects at various points on the horizon, is 88E worth another look?…”
Oil exploration and appraisal company 88 Energy (AIM: 88E) attracted considerable investor interest early this year after building a promising portfolio of prospects located on Alaska’s largely unexplored North Shore. The first two exploratory wells disappointed, halving the company’s value. But with money remaining in the bank, and new prospects at various points on the horizon, is 88E worth another look?
88E owns and operates four prospective projects on the Alaskan Central North Slope, funding their exploration, in part, through cash flows secured from a majority interest in a group of producing wells in the Permian Basin, Texas. Alaskan oil exploration continues to be politically contentious – the Arctic National Wildlife Refuge is one of the largest areas of untouched wilderness in the US. But the limited exploration that has taken place indicates rich hydrocarbon resources. The North Slope, 88E’s area of interest, though relatively unexplored, with just 500 exploration wells, boasts some of the largest oil fields in the US, including Prudhoe Bay, North America’s largest.
Initial disappointment at Project Peregrine
The company’s four Alaskan prospects are at various stages of development. The wholly-owned Project Peregrine, acquired in 2020, spanning 195,973 acres, is targeting the ‘Nanushuk’ reservoir contiguous with Conoco Phillip’s Harpoon and Willow drilling programmes to the north, the latter of which contains a recoverable 750-800 MMbo. 88E’s current estimates indicate Peregrine has a total mean prospective oil resourceof 1,624 MMbo.
There was significant disappointment earlier this year at Peregrine when the Merlin-1 and Merlin-2 exploratory wells indicated reservoir quality at the chosen drilling location was insufficient to warrant a production test. Drilling turned up ‘fluorescence, oil sheen, petroliferous odour and cut noted in the drilling cuttings, elevated C2-C5 mud gas readings over the target zones with total gas significantly above background gas readings and also evidence from the reservoir sampling tool of moveable hydrocarbons.’ But the company was unable to obtain a fluid sample at surface or perform a flow test. Though analysis ‘indicated sufficient permeability/porosity to obtain a hydrocarbon sample, results from the wireline programme have demonstrated target zones to have lower than anticipated porosity/permeability resulting in difficulty obtaining fluid samples of any significance.’
While acknowledging the anticlimactic results, 88E said that the wells were drilled on the basis of ‘sparse, vintage 2D seismic data’ that could only offer a narrow view of the reservoir and limited optionality on drilling locations. The company ‘will assess the merits’ of a future 3D seismic acquisition or in-fill 2D programme to define optimal play fairways and determine the Project’s potential commerciality. Last month 88E said detailed analysis of all data obtained from the Merlin-2 drilling programme, and an independent basin modelling study, indicated that richer resources may lie in locations somewhat to the north of that drilled by the Merlin wells, which was ‘a lower energy environment than originally anticipated’. The ‘abundant oil shows’ that the wells had succeeded in indicating were ‘encouraging’ for the as yet untested northern prospects.
Though Peregrine got most of the attention this year 88E has also advanced its Project Icewine prospect, in which the company has a 75pc interest, a 193,000 acre field with a resource currently estimated at 1.77 billion boe. An exploration well is planned next year to further define the acreage’s potential ahead of an expected strategic-farm out. An independent evaluation of the prospect’s play fairways, published earlier this year used well information from presentations publicly released by neighbouring explorer Pantheon Resources (AIM: PANR), to confirm that three reservoir units drilled by Pantheon, the Shelf Margin Delta (SMD), Slope Fan Set (SFS) and Basin Floor Fan (BFF), which have flowed 35 to 40 degree API oil, extend into the Project Icewine acreage.
A maiden Independent Prospective Resource estimate completed at Project Icewine East published in August indicated a potential resource of 1.03 billion barrels of oil recoverable from multiple reservoir zones. The following month the company completed interpretation of 3D seismic data covering a significant area over the Icewine East leases which, together with Amplitude Variation with Offset (AVO) analysis had helped to identify the location for an exploration well, Hickory-1, planned for ‘1H 2023’. Hickory-1 will test the SMD, SFS, BFF and Kuparuk reservoir units, which are interpreted to extend from Pantheon’s acreage onto Icewine East. Planning and permitting for drilling are currently underway.
Two longer term prospects
88E’s two other Alaskan prospects are at earlier stages of development. The company’s wholly-owned Umiat Oil Field, acquired last year, features an historic oil discovery in shallow Nanushuk sandstones, located immediately adjacent to the southern boundary of Peregrine, opening the prospect that ‘in combination with Project Peregrine’ Umiat may have ‘the potential to form a potentially large oil field development.’ Current estimates indicate a 2P net reserves to revenue entitlement of 94,007 barrels of oil, and 3P net reserves of 43,439.
88E says that initial internal volumetric calculations suggest ‘multi-million barrels of potentially recoverable oil’. Historic flow testing demonstrated a sustained rate of 200 barrels per day with no water, with a maximum rate of 800 barrels of oil per day, but a performance review concluded the well ‘significantly underperformed due to poor drilling and completion techniques’: a modern trajectory and completion design could produce at ‘stabilised rates of between 800 and 1,600 bopd’. Discussions are underway with an Alaskan drilling operator regarding use of a new light weight rig and optimised operations to drill a cost-effective exploration well designed to unlock the field’s potential.
88E’s 100pc owned Yukon Leases, spanning 19,000 acres, also encompass an existing historic discovery, the Yukon Gold-1 well drilled back in the 1990s, which indicated a 90 MMbo prospective resource. The Leases include 3D seismic ready for interpretation, and discussions ‘continue with nearby lease owners to explore joint development opportunities’.
Earlier this month the company moved towards a fifth Alaskan interest, being ‘declared the highest bidder for select acreage offered as part of the North Slope Areawide 2022W Oil and Gas lease sale’. The prospective Project Leonis will comprise 10 leases covering approximately 25,600 acres, and contain an historic exploration well drilled by ARCO in the 1980s targeting the deep Kuparuk and Ivishak reservoirs. 88E says that an ‘initial internal review and interpretation of … 3D seismic data reveals a strong seismic-well tie and a clear seismic amplitude at the … prospect level. Encouragingly, the prospect appears to be bound by faults on three sides which potentially serve as the trapping mechanism.’ The Project remains subject to an adjudication process and regulatory approvals, with formal award expected in 1H 2023. Further work and analysis will further define the acreage’s potential and define a possible exploration programme and timeline.
88E’s Texan cash cow
Earlier this year 88E made its first move into producing oil and gas assets with the acquisition of a 73pc non-operating interest in Project Longhorn, located in the Permian Basin with independently certified net 2P reserves of 2.1 MMboe. Following 88E’s purchase the partners embarked on a workover programme to double the Project’s output from 300 boe per day. The first three workovers succeeded in increasing production by 70pc, generating $1.2m for 88E, prompting plans for a further 11 workovers and new drills to push the rate up to 1,300 boe. A September update reported Longhorn was delivering around 450 boe per day, an overall output increase of 60pc since the acquisition. A fifth workover had been completed, with one more expected by December. The programme had secured net cash flows of $1.9m, with produced expected ‘to reach over 500 BOE per day by end of 2022’. The work programme for 2023 will be announced ‘prior to year end’.
88E’s H1 results reflected the cost of Project Peregrine’s Merlin operations, the company recording a loss of $67m against an H1 2021 profit of $445,446. But it was debt free with cash on hand of $10.5m (H1 2021: $32.31m), and net assets of $80m. An August placing raised £8.59m for pre-planning and permitting for the Icewine East well, and preparations for a flow test programme. The money will also be used for working capital and ‘portfolio expansion opportunities’.
After Merlin wells failed to take off 88E’s share price plunged from 2p to 0.7p in the space of a day, a drop in value from which the stock has not yet recovered, bumping along at around 0.5p to 0.75p ever since, fixing the company’s market cap at around $110m at the time of writing. And as 88E’s interim results made clear, it was an expensive venture. But the company isn’t carrying debt, has cash, and is drawing revenues from Project Longhorn. Project Peregrine seems to have potential north of the initial Merlin targets, though the company has not detailed its next moves here yet. Project Icewine, then, with the forthcoming Hickory-1 well, would seem to be the next concrete event on 88E’s horizon. The other three Alaskan projects are interesting, but longer term prospects. The company is one of the few to have built a portfolio in a highly prospective region that has not yet been thoroughly explored, and because of ecological sensitivities quite possibly never will be. If it can stay in business long enough to unlock even some of the potential those assets promise, 88E’s stock will surely climb. But prospective investors should probably not expect any fireworks in the immediate future.