88E’s drilling ‘sequel’ to deliver a blockbuster result?
12 minute read
Share price when sent: $0.028
Back to the Future 2.
The Godfather 2.
What do these films have in common?
They are widely agreed to be better than the original.
Sequel films are generally worse than the original, but there are some great examples of the sequel being a lot better... and while high risk oil exploration has nothing to do with films, financiers know that both have a similar chance of success.
We are hoping 88E Energy’s (ASX:88E) next drilling event “Merlin-2”, can be even better than the original Merlin-1.
This article will explain why...
After the success of the Merlin-1 well earlier this year, where light oil was detected across three horizons, 88E is preparing to drill a follow up well to get a better understanding of just how much oil it could be sitting on.
The Merlin-1 well delivered 88E’s best exploration result to date on the North Slope of Alaska — confirming the presence of an active hydrocarbon system of enormous potential.
We are now looking forward to Merlin-2 - the sequel.
During the drilling of Merlin-1 and whilst waiting for a result, wild speculation rapidly drove 88E’s share price from 0.8¢ up to as high as 9.6¢, before it just as quickly fell back to 2.5¢ (still a healthy gain from 88E’s pre-drill share price).
Over the last few months 88E’s share price seems to have stabilised, as 88E continued to test what samples it could get from Merlin-1.
Every piece of news so far from the Merlin-1 analysis has pointed toward the presence of oil in multiple stacked targets...
In recent weeks, 88E dramatically improved its balance sheet, raising $24M at 2.8¢ as it readies for the Merlin-2 follow up well, adding to the $14.9M it already had. It has zero debt.
The 88E share price has naturally settled around the 2.8¢ mark since the new shares were issued to placement participants as part of the capital raise.
We expect there to be a bit of placement digestion at these levels over the coming weeks as 88E gets ready for its next major drilling event.
88E is on track to drill Merlin-2 in early-2022 during the Alaskan winter drilling season at its Project Peregrine.
This is a follow up appraisal well to the successful exploration well at Merlin-1 drilled earlier this year, which demonstrated the presence of an active hydrocarbon system of enormous potential in what is already a world class petroleum basin.
An ‘appraisal’ well is drilled into an already discovered hydrocarbon accumulation to get a better understanding of its extent and size.
The Merlin-2 well is targeting 652 million barrels of oil at Project Peregrine, which now has more than 1.6 billion barrels of oil in independently assessed gross mean prospective resources.
This means the geological chance of success at Merlin-2 (of 56%) is higher compared to an exploration well like Merlin-1 — pretty good for high-risk, high-reward oil exploration.
We are hoping that the sequel will be better than the original - which was already pretty wild...
88E is busy with preparations for the Merlin-2 appraisal well, commencing rig selection and drill permitting.
88E’s share price today is well down from where it was just over a month ago when it demonstrated the presence of light oil from Merlin-1 across three horizons, which we attribute to the capital raise and 88E entering into a quieter period in between drilling events.
However the key takeaway for 88E investors is that now 88E is armed with a strong balance sheet, no debt, and ~$37M cash in the bank, and it owns 100% of its Project Peregrine.
So 88E has the option to choose to either drill the Merlin-2 well using existing funds, OR it can farm down a % of the project and bring on a strategic farm-in partner to finance the drilling ... IF the right deal comes along.
Financially and operationally, 88E looks in a much stronger position than prior to Merlin-1 (when it had a weaker balance sheet and it was drilling a higher risk exploration well). With that, comes the luxury to be in control of its destiny.
What 88E learnt on Merlin-1
All samples and tests that 88E did at Merlin-1 well pointed toward oil, and we now know that 88E has:
- The presence of oil in MULTIPLE stacked targets,
- Evidence of ‘movable’ hydrocarbons, and
- Confirmation of the geological model down below.
88E’s Merlin-2 well is designed to target some 652 millions barrels and thicker zones of reservoir intervals, which are hopefully of higher quality than what Merlin-1 found.
You can see the 88E management discuss the Merlin-1 results and what they plan to do at Merlin-2 in this video here.
Our Investment Plan for Oil Explorers
We like to invest in energy explorers early, during quiet periods ahead of planned drilling.
This allows us to build a position ahead of the speculation often seen in the weeks prior to and during major drilling events that drive share prices up.
So this is the time where we, as 88E investors, wait patiently ahead of the upcoming Merlin-2 drilling event.
We think the next big pieces of news for 88E will likely be around a rig contract and drilling permits for Merlin-2 — news that should remind that market that drilling is not far off.
We are not short term traders so can't comment on short term momentum trading. Our less exciting strategy is to patiently hold a stock before it spikes rather than trying to chase momentum trades. We may then look to take some profit off the table once the share price begins to gain traction.
In general, please remember to only invest only what you are comfortable to lose and don't try to trade small caps on borrowed money. Make sure to read our ebook on how we invest in small cap stocks if you are new to investing.
88E has a track record of consistently delivering share price moving newsflow, having drilled five high risk / high reward wells since 2016.
We caution that investing in 88E can be a wild ride and investing in this stock is not for the faint of heart.
Year after year we’ve seen a similar pattern in 88E’s share price — rising ahead of its drilling during the Alaskan winter drilling season, while trading sideways during its quiet “drill preparation” phases.
88E’s Project Peregrine: Merlin-1 exploration well
Just over a month ago, 88E confirmed the presence of an active hydrocarbon system of enormous potential at its Project Peregrine, in what is already a world class petroleum basin the National Petroleum Reserve of Alaska (NPR-A).
Peregrine covers about 195,000 continuous acres along trend to recent discoveries in Alaska’s oil-rich Nanushuk formation, including energy major ConocoPhillips’ recent Willow discovery, while Oil Search hit oil last year ~50km north-east of Peregrine and has reported 3,520 barrels of oil per day in production testing.
88E observed the presence of light oil across three separate horizons in its evaluation of the Merlin-1 exploration well that was drilled in the last Alsakan winter — the news we have been waiting for.
The well was drilled to a relatively shallow depth of 5,267 feet, yet intersected several oil-bearing sequences of Nanushuk sands.
Having incorporated the Merlin-1 results into Project Peregrine’s dataset, the project’s mean total prospective resource is now an estimated 1.6 billion barrels.
88E Managing Director, Ashely Gilbert described it as “the best well we’ve drilled on the North Slope of Alaska to date”.
While the Merlin-1 well has now confirmed an active petroleum system, a follow-up (Merlin-2) appraisal well will be drilled in the upcoming Alaskan winter drilling season.
88E’s Project Peregrine: Merlin-2 appraisal well
The Merlin-2 appraisal well, planned for the first quarter of 2022, has a recoverable oil resource estimated at 652 million barrels with a Geological Chance of Success (GCOS) of 56% — very reasonable odds for high risk oil exploration.
Merlin-1 detected light oil in the Nanushuk (N18, N19, N20 reservoirs, below), which Merlin-2 will test.
Merlin-2 is to the east and closer to the shelf break than Merlin-1, where 88E expects to find “enhanced reservoir thickness and quality”. Of course, drilling is risky and this is just what they think is down there — the only way to find out for sure is by drilling.
The Merlin-1 well was not deep enough to test the N14 target (above), but the company plans to drill the Harrier-1 well at Peregrine in the future which will test this target as it remains a significant target of interest. There is also the option to drill a deeper Merlin-1A well to test this target.
88E again has 100% of Project Peregrine
88E again owns 100% of Project Peregrine, which holds the Merlin as well as the Harrier prospects, having bought back the project in its acquisition of Alaska Peregrine Development Company’s stake.
With 100% ownership 88E has the option to farm down to a strategic partner if the right deal is available, but also has the option to drill alone if the right strategic partner isn’t found.
For newer readers you can read all our updates on 88E’s exploration before Merlin-1 was drilled this year HERE.
88E’s Board and Management
We have been long term investors in 88E since 2016, and big supporters of the previous MD Dave Wall’s efforts in taking 88E from a sub $10M micro cap stock to where it is today - however we have also been impressed with the new MD Ashley Gilbert since he took over the reins earlier this year and the team he has built around him.
Ashley was previously 88E’s CFO and company secretary. Prior to that he was the CFO of Neptune Marine Services and Nido Petroleum, and also held various finance positions with Woodside Petroleum.
Mr Philip Byrne, the former CEO and MD of Nido Petroleum is the new chairman of the 88E board and brings over 40 years’ experience in the international oil and gas industry including a stint at Santos, BHP Petroleum and BG Group. We expect with a resume like that, Phillip would be able to open some doors for 88E in terms of attracting a high calibre strategic partner.
Also joining the board are Ms Joanne Kendrick, a petroleum engineer with over 25 years’ experience in the global oil and gas sector and currently a non-executive director of Buru Energy and Sacgasco Ltd.
Dr Stephen Daley brings to the board more than 38 years’ of management and technical experience in global oil, gas and power sectors including Conocco and BP.
One of the first jobs that the new MD Ashley Gilbert set about doing was to make sure 88E’s balance sheet was in a strong position. As the former CFO for 88E and with a background in finance, we understand why that would be a priority — without a strong balance sheet a company can be in real trouble.
So 88E now has zero debt and sits on a very strong cash balance of $37M — enough to fund Merlin-2 on its own, or potentially go out and find a farm out partner. Bringing in a strategic partner to fund the drilling program is an option, but 88E is not reliant on securing one that might come on less favourable terms.
88E’s adoption of ESG
88E has also adopted the World Economic Forum’s Environmental, Social and Governance (ESG) framework — the global standard for ESG reporting and a big tick of approval for 88E.
The framework encompasses 21 core metrics and disclosures that will see 88E report on ESG factors, demonstrating the company is taking a proactive approach to important ESG issues including governance, anti-corruption, human rights, carbon emissions, water consumption, ecological sensitivity, and diversity.
Independent impact monitoring technology provider, Socialsuite, is assisting with measuring, monitoring and reporting of these core ESG metrics.
88E said it will keep the market updated regularly on its ESG performance and progress as it “set a new standard in measuring the sustainability and ethical impact” of its operations.
88E’s Upcoming Catalysts
88E is set to begin drilling the Merlin-2 appraisal well in the first quarter of 2022. It has started the process of rig selection and permitting, and given the Alaskan drilling season is starting soon and ends in March, we expect more newsflow in the lead up to this drilling event, just like every previous time.
While the company is now well funded, it is open to a potential farm-out of the Peregrine acreage to secure (the right) strategic partner. Having the flexibility to only join forces with the right partner is an important point, as this can be crucial to drilling success.
We can also expect near term news from out of the company’s Yukon leases, where 88E increased its acreage in January of this year. Future exploration plans are ongoing, and 88E may look to unlock value here by advancing negotiations with nearby resource owners to aggregate the leases into a joint development area.
Umiat Oil Field
A request by 88E subsidiary, Emerald House LLC — the owner of 100% of the Umiat oil field leases, for a 24 month extension to its obligations on the leases has been approved. This deferment of its Umiat well commitment allows for the company to undertake further review and commercialisation studies.
Studies to review the historical Umiat oil field development plans have commenced with initial results identifying potential cost savings on planned development CAPEX, and alternative potential routes to market for the crude, which could include a potential tie-in to ConocoPhilip’s Willow oil field development to the north of the acreage.
88E’s geoscience team will undertake a reassessment of its Project Icewine acreage, which has an independent resource of 1.77 billion BOE, ahead of an expected farm-out. With encouraging results from the Pantheon’s nearby Talitha-A well, there may be potential to extend the target into 88E’s leases at Icewine East.
88 Energy Corporate Milestones
Project Peregrine (Main Bet #1)
✅ Acquired Project Peregrine
✅ Farmout Agreement Secured
✅ Buy back of 100% of Project Peregrine from APDC
🔲 Farmout Peregrine to potential new partner
🔲 Planning for a possible in-fill 2D or 3D seismic
🔄 Drill Rig Secured
🔄 Drilling Permits Secured
🔲 Drill Rig Mobilized to Site
🔲 Drilling Commenced [Q1 2022]
🔲 Drilling Complete
🔲 Lab Results 1
🔲 Lab Results 2
🔲 Lab Results 3
Project Icewine (Side bet)
✅ Drilling Results (Charlie-1)
✅ Resource Upgrade
⚔️ Positive results from neighbour Pantheon Resources drilling
🔲 Farmout of acreage to fund an appraisal well
🔲 Commercialisation Opportunities (Charlie-1)
Umiat (Side Bet)
✅ Acquired Project
🔄 Assess development options
🔲 New Milestones Added
Yukon Leases (Side Bet)
🔄 Negotiations with Nearby Resource Owners
🔲 Projects Aggregated into Joint Development Area
🔲 New Milestones Added