88 Energy Primed For Alaskan Venture

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Oil and gas explorer 88 Energy has captured the attention of DJ Carmichael as it begins an extensive exploration program in Alaska.

-Encouraging results from de-risking of the Icewine project
-Icewine#2 to be spudded in the second quarter 2017
-Generous incentives for Alaskan explorers
 

By Eva Brocklehurst

88 Energy ((88E)), an oil and gas explorer, has begun a comprehensive exploration and appraisal program in its Alaskan Holdings and DJ Carmichael researchers take a closer look at the stock.

The company has a 77.5% working interest in over 271,119 gross acres on the Alaskan central North Slope. North Slope is one of the last remaining significant oil shale plays in the US. The company is partnering with US-based Burgundy Xploration which is headed by Paul Basinski, a key player in the discovery of the prolific Eagle Ford shale in Texas.

There have been encouraging results in the de-risking of the Icewine project, which is located 35 miles south of Prudhoe Bay and in proximity of very large conventional oil discoveries. The company has determined, from the Icewine #1 core testing program, that the rock mechanics of the shales are conducive to fracturing.

The key to success in extracting liquids from shale is that the oil moves through the newly created fractures towards the well bore. The lower the viscosity of the oil, the easier it will be to move it under pressure, and that improves recoveries and results in improved well economics.

The company believes the ground has potential for conventional accumulations of oil and is working to mature promising leads into drill targets. A comprehensive 2D seismic survey was recently completed and the company subsequently announced it had identified a potential 1.14bn barrels of net mean un-risked prospective resources. Several of these leads could be stacked as a play, which would allow for the testing of multiple zones from a single well.

Icewine #2

Icewine #2 is a vertical well and spudding is set for the second quarter in 2017. After drilling, the well will be hydraulically stimulated and flow tested. The primary purpose of this well is to hydraulically stimulate the HRZ/Hue interval to test if it is possible to produce hydrocarbons and increase the dataset. The company estimates will take 30-40 days to drill, log and conduct micro stimulation. Flow test results are expected mid 2017.

Value

A capital raising of $17m was undertaken recently, which adds to a cash balance of $43m. DJ Carmichael values the stock at 8.5c a share and initiates coverage with a Speculative Buy rating.

Because of the high fixed capital cost of an unconventional development, small changes in the oil price can have a big impact on the project value. At an oil price of US$55 a barrel on the analysts assumption the project is worth US$1.1bn on an un-risked basis. An oil price of US$48/barrel is the break-even spot in the scenario. Hence, if oil retreats to its mid 2016 lows the project will not be economic.

While the stock is compelling, in DJ Carmichael's view, from a technical and market perspective, it remains a high-risk play. Several of the key risks, such as rock mechanics and flow rates, should be addressed through the drilling and the hydraulic fracturing of Icewine#2. Nevertheless, Alaska is a high cost environment because of its weather conditions and remoteness, and while costs have fallen it is unlikely that costs will be the same as in the lower states of the US.

Background

DJ Carmichael notes that oil production has been on a long-term decline in Alaska because of the maturity of the Prudhoe Bay fields. To offset this trend by attracting explorers to the region and help offset the high cost of exploration, the state government has historically offered very generous incentives to companies.

The refunding of a large portion of exploration costs on the slope has proven to be an attractive incentive for explorers, especially to smaller players with small balance sheets, the analysts observe.

The company's area of exploration is situated within a favourable infrastructure setting, with the Icewine project astride the Dalton Highway and the Trans-Alaskan Pipeline System. TAPS passes through the acreage and includes pumping stations. The pipeline is underutilised as oil production Alaska has fallen over the years, which will allow for exports directly from the field to Valdez in the south where the pipeline terminates.
 

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