88E / EEENF shows oil blobs under fluorescent light - net pay 5-7 days away

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 24,387,632 88E shares 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.

We have images of oil under fluorescent light...

Colourful, fluorescent blobs.

AND a new reservoir unit has been discovered.

It’s been a big day for 88 Energy (ASX:88E | OTC:EEENF) investors, with a fair bit of material news coming through this morning.

88E is in the midst of drill testing a 647 million barrel prospective mean unrisked resource (net to 88E) on the North Slope of Alaska, in the USA.

88E has now successfully drilled to Total Depth at its Hickory-1 well.

Preliminary net pay has been calculated across all pre-drill reservoir targets, plus an entirely new reservoir was identified that had ‘abundant oil shows in cuttings’.

88E now plans to run a wireline logging program over the next 5-7 days, to confirm the initial interpretation of multiple pay zones identified, and obtain data to optimally design and plan the flow test for the well.

The news is looking good here - given 88E will now begin preliminary planning for a flow test in late 2023/early 2024, including identifying drill rigs and permitting.

This morning we got visual confirmation of oil shows from 88E’s well, below are those images:

Below again is the oil - as evidenced by fluorescence under UV light:

Today, we also got the news that 88E hit a completely unexpected reservoir formation which also had oil shows in cuttings.

This reservoir had never been hit in any other nearby wells.

This reservoir was therefore not expected in the pre-drill plan and it sat outside of 88E’s 647 million barrel prospective resource calculation...

To determine final net pay numbers, 88E will now run a wireline logging program that’s expected to take around one week.

We expect to see 88E’s next update after the wireline logging program is complete, 5-7 days from today.

88 Energy

ASX:88E 🇦🇺| LSE: 88E 🇬🇧

OTC: EEENF 🇺🇸

Our deeper dive on today’s 88E announcement:

88E’s Hickory-1 well has hit total depth (TD) of 10,650 feet without any hiccups.

88E reported preliminary net pay calculated across all pre-drill targets, which was based on initial interpretation of real time logging while drilling data (LWD), together with multiple oil shows, elevated mud gas readings, and high resistivity signatures observed throughout.

Our take:

The key takeaway is that 88E hit all of its planned reservoir targets except for the Kuparuk reservoir, which was always a tertiary target.

88E decided against drilling Kuparuk in order to preserve borehole conditions for the wireline logging program.

We think this validates the findings from the primary/secondary targets showing that 88E didn't feel the need to drill Kuparuk this time around. 88E did however note that it may come back and drill that target at a later date.

The bigger news was that 88E hit a completely unexpected new reservoir.

Across the primary SMD targets

• Fluorescence under UV light and streaming “blue-white cuts” - both make for good signs that there is sample/reservoir permeability.
• Mud gas readings and high resistivity - again, more positive signs of reservoir quality.
• Hydrocarbon pay zones identified - this is important as the market usually judges these type drill programs as a failure if there is no net pay across reservoir targets.

Upper SFS (newly identified reservoir)

• Fluorescence under white/UV light and streaming.
• Elevated mud gas readings (>15x background gas levels).
• Visual porosity indicating oil presence.
• Hydrocarbon pay zones calculated.

As we noted above, the Upper SFS reservoir was not included in 88E’s pre-drill 647 million barrel prospective resource. This could mean (depending on the final results) that 88E’s target was in fact larger than that number going into the Hickory-1 drill program.

88E said that after today’s news it would look to define a resource estimate for this newly defined reservoir - a welcome and surprise bonus.

Secondary SFS target

• Target was 99 (gross) feet thicker and of higher quality than expected.
• Fluorescence under UV light and streaming.
• Elevated mud gas readings + high resistivity.
• Hydrocarbon pay zones identified.

Secondary BFF target

• Fluorescence noted.
• Elevated mud gas readings and high resistivity.
• Hydrocarbon pay zones identified.

While 88E’s well was an appraisal well (testing known hydrocarbon presence), more often than not we expect to see at least one of the reservoir targets deliver nothing.

88E’s results exceed our pre-drill expectations given that hydrocarbon pay zones, mud gas readings, and fluorescence were identified across all pre-drill reservoir targets.

88E announced:

“Preliminary estimated net pay across all targets to be confirmed by wireline logging, which is set to commence promptly”.

Our take:

While 88E didn't announce the net pay numbers across its reservoir targets today, it did note that they have “preliminary” numbers across all targets.

The final net pay numbers will come after the wireline logging program, which is expected to take 5-7 days to complete.

88E is obviously waiting on the final net pay figures before announcing them to market.

We don't mind 88E’s approach of under promising and (hopefully) over delivering here.

The alternative is rushing out preliminary net pay numbers and eventually having to bring the final net pay figures down.

88E Announced:

“New Upper SFS reservoir identified, not previously intersected by nearby wells with abundant oil shows in cuttings”

Our take:

Initially 88E was targeting six stacked targets including the undrilled Kuparuk reservoir unit below the Hickory-1 well’s total depth.

In addition to successfully hitting the pre-drill targets, 88E hit a whole new reservoir unit which they have called the “Upper SFS”.

This news is important because the company’s pre-drill expectations were largely modelled off previous wells drilled in the region.

That makes this new reservoir unit an unexpected win for 88E.

This is a positive sign that either:

1. The reservoir units are getting bigger and more extensive across 88E’s ground in the region, OR
2. 88E is working with additional reservoir units that its neighbour Pantheon Resources to the north did not hit. Again, this could mean the oil structures are larger to the south in 88E’s ground.

What happened the last time 88E showed oil under fluorescent light?

Most of us remember 88E’s 1,000%+ run in 2021 when it drilled the Merlin-1 well.

This happened during the peak of one of the wildest bull markets we have seen in years.

The big speculative run in 88E’s share price came after 88E put out the images of oil shows under fluorescent light (much like the fluorescent blobs the company showed today).

However - we don’t expect to see a similar share price move this time around - things like market conditions, oil prices, and pre-drill expectations play a role in share price moves.

For context here is our comparison from a few weeks ago of the two wells 88E drilled - note this has not been updated based on Hickory-1 results so far.

What we wanted to see and our Bull/Bear case expectations:

So far 88E has delivered the following:

• ✅ Fluorescence (an indicator of oil presence) - 88E confirmed fluorescence today.
• ✅ Oil odour in samples - 88E noted oil shows today.
• ✅ Mud gas readings - 88E noted mud gas readings today.
• ✅ New reservoir unit identified (unexpected) - 88E hit a new reservoir unit that sits outside of its current prospective resource estimate.

Next we want to see 88E deliver:

• 🔄 Net pay/gross pay numbers (an indicator of the size of the reservoirs) - 88E now has preliminary net pay numbers, final data will come after the wireline logging program (expected to take 5-7 days to complete).
• 🔄 Most importantly, we want to see a commitment from 88E to case and suspend the well so it can return to it for flow testing at a later date - Today 88E confirmed it would begin “preliminary planning” for a flow test later this year/early 2024.

Considering 88E has now started “preliminary planning” for a flow test later this year/early 2024 the drilling program results are so far sitting inside our ‘bull case’ expectation.

• Bull case = Drill results positive enough for 88E to commit to a flow test.
• Bear case = 88E decides not to flow test the well.

At this stage we still want to see what comes from the wireline logging program before we categorise where the drill results sit.

Ultimately the commercial viability of the well will be determined by that flow test later this year or in early 2024.

This brings us to our “Big Bet” for 88E.

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.

To monitor 88E’s progress since we first Invested and how the company is performing relative to our “Big Bet”, we maintain the following 88E Progress Tracker:

Update on our 88E Investment Strategy

Our last 88E update was only five days ago so not much has changed to our Investment Strategy since then.

Regular readers know that our strategy for early stage oil and gas explorers is to:

• Invest long before the drilling starts.
• Patiently hold while the company does all of the pre-drilling work.
• Wait for the company’s share price to rise closer to the drilling date, free carry into the speculative buying and ride the rest of our position into a drilling result (hopefully a good one).

In the lead up to 88E’s Hickory-1 well, we started building our position in mid-2022.

Subsequently, we increased our Investments in both capital raisings — at 0.9c per share and again at 0.95c per share.

Since drilling started, 88E’s share price has traded sideways in a range between 1c and 1.3c, and the share price is still in this trading band.

So far, we haven't seen a big move higher and so haven’t been able to Free Carry our Position yet.

However, as we flagged last week, we previously de-risked around ~25% of our pre-drill position. We have not sold any more shares since then.

We may consider selling a further ~25% if the share price runs between now and the wireline logging results.

As mentioned in our last 88E update, our plan has always been to hold the majority of our position and wait for the share price to re-rate off some positive drilling news.

So far we haven't seen a large move higher - but there is another ~5-7 days of wireline logging to go, and anything could happen over the coming weeks.

Wireline logging should take 5-7 days now.

In an ideal world, we would like to be Free Carried before 88E announces its final drill results, but we are prepared for the fact that this may not happen.

This is our Investment strategy, however, it's not right for everyone and may not suit your risk profile or circumstances. Always seek professional investment advice when investing in high risk small cap exploration stocks.

What’s next for 88E?

Drilling of the Hickory-1 well:

✅ Drilling commencement - 10 March 2023.

✅ Drilling to 10,650 feet Total Depth (TD) - Drilling completed 3 April 2023.

🔄 Wireline logging program - program to start now and and is expected to take 5-7 days to complete.

What are the risks?

88E will now run its wireline logging program to get the last bit of data from its Hickory-1 well.

While the news to date from the well has been positive, we want to see the final results come in and net pay numbers announced before making a judgement on whether exploration risk has been mitigated for 88E.

Exploration risk is, therefore, still a key risk to our Investment Thesis for 88E.

To see other risks we face see our Investment Memo here or by clicking on the image below:

Our 88E Investment Memo

Below is our 88E Investment Memo where you’ll find:

• Key objectives we want to see 88E achieve
• Why we Invested in 88E
• The key risks to our Investment thesis
• Our Investment plan