88E did it - a flow rate of oil to surface - and there’s one more result to come

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 17,464,590 88E shares and 6,296,297 88E options at the time of publishing this article. The Company has been engaged by 88E to share our commentary on the progress of our Investment in 88E over time.

They’ve actually done it.

Yesterday was the biggest achievement 88 Energy (ASX:88E) has delivered in the last 4-5 years.

88E delivered a flow rate of oil to the surface from its Alaskan assets.

88E recorded a peak flow rate of 70 barrels of oil per day.

88E’s result is in line with its neighbour directly to the north, UK listed Pantheon Resources - who got flow rates of circa 45-108 barrels of oil per day.

These flow results are all from vertical wells - production rates in long horizontal wells are typically 6-12x higher than vertical well tests.

88E’s flow test result was from a reservoir that Pantheon has not discovered on its ground yet - so that's an entirely new oil discovery by 88E...

... And 88E has one more reservoir to flow test in the coming days.

Pantheon is working up its project next door to 88E, and is currently capped at over ~3.5x the valuation of 88E.

Pantheon’s market cap is ~A$524M, whereas 88E trades at a market cap of ~A$150M.

Even though 88E yesterday proved it has similar oil producing potential on its ground across similar reservoir systems, directly next door.

We think this valuation gap between 88E and its peer next door might be part of the reason the UK market leapt on the 88E news last night - at one point 88E shares were up ~62%.

The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

88E shares on the ASX were up only 20% yesterday.

The ASX typically follows the lead of the UK, so we are expecting that this morning 88E will also trade up similarly to catch the UK’s moves.

Of course - no guarantees with high risk speculative stock investing - always only invest what you can afford to lose.

Beyond the small leg up over the last 24 hours, 88E still needs plenty more to catch up to Pantheon, so it will be interesting to see how the coming weeks play out.

A successful flow test result is something that few other ASX listed oil and gas stocks can claim - and they even managed to pull out some hydrocarbon samples in sealed containers:

Here are the oil samples from 88E’s flow test:

As we hinted at above, 88E still has one more reservoir to flow test - the shallower SMD-B reservoir from which Pantheon managed to produce a ~45 BOPD flow rate.

So there is one more flow test result to come for 88E, likely in the next 10 or so days...

A similar result to yesterday’s flow test could see 88E continue to sustainably re-rate off material results.

Ultimately, the baseline for us will be the ~45 BOPD number Pantheon put out - if 88E can improve on that then we think it will be a very good result for 88E.

With key flow test results due this year from our other investments EXR, IVZ and NHE, we are delighted that 88E has kicked off the 2024 “Year of the Flow Test” with a great start and hopefully commencement of a sustained share price rise.

88 Energy
ASX:88E 🇦🇺
LSE: 88E 🇬🇧
OTC: EEENF 🇺🇲

With yesterday’s news, 88E has confirmed a hydrocarbon discovery across one of the multiple stacked targets from its Hickory-1 well.

Yesterday’s results were actually over a year in the making. 88E successfully drilled the Hickory-1 in early 2023.

By November 2023, 88E had declared a discovery from one of the six reservoirs intercepted - a ~250 million barrel contingent resource in the lower BFF reservoir.

The Upper SFS (the one yesterday's flow test results came from) was an unexpected surprise...

Until now, that specific reservoir hadn’t been tested - not by 88E or $524M capped neighbour Pantheon Resources.

That's why we think yesterday's results were big for 88E and a differentiator for its project relative to its neighbour.

88E’s still has a second flow test to come from the shallower SMD-B reservoir so we should get another set of results before the end of this month.

Ultimately, the goal is to declare discoveries across both reservoirs (one down, one more to go) and add to 88E’s existing contingent resource number.

How did 88E’s first flow test results stack up against our expectations?

We published our expectations for 88E’s flow test results in our last 88E note: What Success Looks like - 88E’s Pathway to Commercialisation.

Our expectations were based on the flow rates 88E’s neighbour Pantheon Resources was getting at its wells immediately to 88E’s north.

Today’s result sits right in the middle of our base case expectation at 70 BOPD.

(Source)

The results also sit in line with other vertical wells drilled by 88E’s much larger neighbour Pantheon Resources.

Pantheon across its three tests produced between 45 and 108 barrels of oil per day.

AND during the ~4 year period when Pantheon was delivering those flow test results, its market cap was at one point was almost ~A$2BN...

So even though 88E has managed to deliver results as strong as Pantheon from a vertical well flow test - its market cap is much less...

(not to mention 88E’s Namibian assets... which are similar to the TSX listed Recon Africa - more on that one later)

Right now Pantheon is capped at ~A$524M - whereas 88E is capped at ~A$150M.

The market will likely focus on yesterday’s flow rate results in isolation, but we think it's worth considering the overall context...

88E’s current flow test is from a vertical well, which means flow rates will naturally be lower than what we typically see from horizontal wells, where flow rates can be >1,000 barrels of oil per day.

Horizontal wells have the potential to increase flow rates by ~6-12x.

So in theory 88E’s Upper SFS reservoir could potentially flow at ~420 to 840 barrels of oil per day from a horizontal well.

And then in a development scenario, there would likely be multiple horizontal wells extracting oil. This is how the project gets to serious scale.

The market is used to seeing big flow rate numbers before re-rating oil and gas stocks, so it's worth noting the potential for 88E is there...

So in summary - multiplying a reservoir’s flow rate using horizontal wells is where we think the potential upside is for 88E’s North Slope assets.

The basic schematic below shows why horizontal wells have stronger flow rates than vertical wells - because they capture a bigger area of a reservoir:

What catalysts are we looking forward to next?

Flow test from the shallower SMD-B reservoir 🔄

Now 88E will transition over to testing the SMD-B reservoir.

The SMD-B is a reservoir that 88E’s neighbour Pantheon has tested in the past. During its flow test, Pantheon managed to produce a flow rate of ~45 barrels of oil per day.

So we hope for the same or an improvement on those numbers from 88E.

Maiden prospective resource estimate for Project Leonis, USA 🔄

While 88E flow tests Hickory-1, it has also been working up its other North Slope asset - Project Leonis.

Leonis sits on ~25,600 contiguous acres immediately south of Prudhoe Bay - the USA’s biggest-ever oil discovery.

We think Project Leonis will be the next asset 88E drills, but to do that, we suspect it will need to bring in a farm in partner to fund part of the drilling costs.

88E picked up Project Leonis in April last year and has spent most of the last 12 months reprocessing existing seismic data AND reanalysing data from a historic well inside the acreage.

88E already has old well data showing ~200 feet of pay from the project's main reservoir target so there is a good chance the numbers will be relatively strong.

At Project Leonis we are hoping to see a maiden prospective resource estimate inside H1 2024, which would give potential farm in partners a better idea of the potential of the asset.

See our latest deep dive on 88E’s Project Leonis here: Will 88E drill Project Leonis next? Watch for a farm-out

Seismic at Namibian assets + neighbour drilling soon 🔄

This 88E asset is one we think the market is paying very little attention to right now...

But it could change in the coming months.

88E is farming into a huge onshore block in Namibia - next door to ~$215M TSX listed ReconAfrica.

Recon is actually planning a well for later this year so any good news from them could translate into a valuation uplift for 88E’s assets.

For 88E, a Nambia drill program is more of a 2025 story, for now the focus is on getting a 200km 2D seismic acquisition program done.

We think the Namibian asset could continue to drive positive momentum for 88E, because:

1. Huge block with potential to host a huge resource
2. Namibia’s fast developing oil and gas industry
3. Assets were picked up before the big offshore Namibian discoveries
4. Namibian onshore peer re-rated by over 40x
5. Project vendors linked to Invictus Energy (ASX: IVZ)
6. Early stage with plenty of upside
7. Strategically located

See our deep dive on the Namibian asset here: 88E heading to Africa on frontier oil hunt - following Shell and Totals 11 billion barrel lead

Ultimately, we are Invested in 88E to see it declare discoveries and eventually attract corporate interest in its assets, whether that be on the North Slope or in Namibia - this forms the basis for our 88E Big Bet which is as follows:

Our 88E Big Bet

“88E makes a large oil discovery that is acquired by a major for over A$1BN”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved - just some of which we list in our 88E Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

What are the risks?

Even with flow test results now coming out, the primary risk is still around “commercialisation risk”.

88E has now shown that oil flows to surface which should be enough for 88E to declare discoveries BUT might not be enough to warrant commercialising the project.

Typically projects require certain flow rates for it to make sense developing a project otherwise the revenues from a well are unlikely to outweigh its development/operating costs.

There is always a risk that 88E’s flow rates are not enough to warrant full scale project development.

Another key risk post flow test will be “Funding risk”.

88E went into the flow test with $18.1M in cash at 31 December 2023, which should be enough to fund its 75% share of the flow test.

The funding risk comes AFTER the flow test is complete with 88E likely to have spent most of its cash on the program.

We also note 88E has mentioned a potential share consolidation if it makes sense for all shareholders, given it has ~24BN shares on issue.

Sometimes a looming consolidation can create uncertainty amongst shareholders and can be a momentary drag on a company's share price or cause some hesitation.

We don't see the consolidation as a risk to our Investment Thesis but more as something that could impact the share price in the short term.

Ultimately in the long term, 88E’s share price will be driven by successfully proving up commercial oil and gas assets.

Our 88E Investment Memo

Our current 88E Investment Memo has been completed.

Post flow test results, we will evaluate the results and consider putting together a new Memo for the company.

First we want to see 88E conclude its flow test and detail its forward plan.

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