88E starts 2D seismic, neighbour $438M ReconAfrica's spud is any day now…

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 69,000,000 88E shares and 6,333,333 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.

88 Energy (ASX:88E) has just started a 2D seismic programme in one of the world’s most prospective new exploration regions - Namibia.

Meanwhile 88E’s onshore Namibian peer - ReconAfrica - is about to start drilling its first well of a drill program with up to 4 wells.

We are expecting ‘well spudded’ news from Recon any day now, maybe even tonight.

We’ve been following ReconAfrica for a few years - seeing it climb to over a $1BN market cap in the lead up to its 2021 drilling campaigns.

ReconAfrica is listed on the TSX-V in Canada - and it's currently capped at almost half a billion dollars.

Any positive results on ReconAfrica’s drilling would be a big positive for 88E.

Recon’s share price has already started moving in the lead up to its drill program - its share price is up by over 100% in the last ~3 months:

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.

Ultimately, 88E is earning in up to 45% of its own Namibia ground.

88E now holds a 20% working interest by funding the 2D seismic programme which started today.

By the end of this programme (expected to be completed this quarter), 88E should get a maiden Prospective Resource estimate, and the identification of future potential drilling locations.

As we pointed out above, 88E’s regional peer ReconAfrica is due to spud the first of up to 4 wells nearby. According to the company’s latest announcement, the first well was set to spud 7th July - yesterday.

If Recon finds something in the coming months, it could be significant for 88E and onshore Namibia.

After new oil discoveries, we typically see a rush of interest into a region, from companies looking for exposure to a new oil and gas province OR from companies looking to make their own discoveries.

That rush typically increases the value of any projects already in the area (like 88E’s).

So over the next few months, 88E can sit back and watch Recon drill a series of wells.

IF Recon is successful, it should lift the read-through value of 88E’s Namibia ground.

At the moment Recon trades with a market cap of ~$438M - ~7.5x bigger than 88E’s market cap which is ~$58M.

(just remember that the oil & gas exploration is high risk, and making a new discovery is rare)

Namibia is one of the hottest spots in the world for oil and gas exploration right now.

(And until now the focus has, been mainly on offshore drilling as opposed to onshore drilling, like ReconAfrica and 88E are pursuing)

In recent months, oil majors have been making consistent discoveries OFFSHORE Namibia - TotalEnergy, Shell and Galp collectively finding billions of barrels of oil.

But now - the market’s gaze is panning towards what could be found on land.

BP for instance, previously highlighted the Owambo Basin of Namibia as one of the few remaining underexplored conventional exploration regions globally.

One of the last true frontiers for big hit oil and gas discoveries.

And 88E is earning into a giant chunk of it, with drilling planned for next year.

88E is farming in up to 45% of a giant 18,500 km2 licence within the Owambo Basin in Namibia.

We think the beginning of a new market narrative about the potential of onshore drilling could be on the cards, pending results from ReconAfrica.

Again, 88E’s ONSHORE Namibian peer (ReconAfrica) is about to start drilling their first well of a drill program with up to 4 wells.

So we will be keeping an eye out for any official spudding news later tonight when Canada wakes up.

At the moment Recon trades with a market cap of ~$438M - ~7.5x bigger than 88E’s market cap which is ~$58M.

We think the valuation gap is a result of ownership levels and the stage at which the two companies' projects are.

88E owns a smaller percentage of its Namibian project and has yet to drill a well on its ground, whereas Recon has already drilled its project and owns a much larger percentage of it.

But 88E is getting closer to its first drill program...

Today, 88E kicked off the first part of its 45% farm-in agreement on its 18,500km^2 of ground.

88E started a 200km 2D seismic survey which it expects to have completed inside this quarter - this means 88E has unlocked 20% of its farm into the ground.

Data processing and the final results from the program are expected in Q4 of this year.

At a very high level the whole purpose of the program is to take the 10 leads Monitor & 88E already have and turn them into credible drill targets.

The project has already had some 2D seismic work done on it - the next phase of work will be to add to that data to identify the best targets where 88E and Monitor think there is a good chance of drilling a successful well.

Post seismic, 88E is likely aiming to:

• Validate and rank 10 different potential drill targets
• Define a maiden prospective resource across the project.
• Pick out the best targets to be considered for future drilling.

Here is where 88E and its JV partner will be running the seismic relative to its existing prospects:

How today’s news impacts our 88E Investment Memo

You can read our Investment Memo in the link below. This memo provides a short, high-level summary of our reasons for Investing, risks and objectives. We use this memo to track the progress of all our Investments over time.

Read our 88E Investment Memo here.

88E’s Namibian asset is a key component of our current 88E Investment Thesis and is the focus of Objective #4 of our 88E Investment Memo.

We wrote our 88E Investment Memo on 20 May 2024 and today we mark off the first milestone for 88E regarding its Namibian asset.

By firming up drill targets, 88E will hopefully move closer to achieving our Big Bet and hopefully attract more interest from the market as selecting drill targets is an important precursor to drilling for Oil and Gas companies like 88E.

Objective #4: Firm up drill target at the Namibian asset
We want to see 88E run the 2D seismic data acquisition program on its Namibian JV. Once completed we want to see 88E lock in a primary drill target for the project.

Milestones
✅ 2D seismic program starts
🔲 2D seismic program completed
🔲 2D seismic results & interpretation
🔲 Maiden prospective resource estimate
🔲 Primary drill target selected

Source: “Objectives” Section - 88E Investment Memo 20 May 2024

We also note that one of the key reasons we are holding 88E outlined in our May 2024 Investment Memo was its proximity to ReconAfrica, so naturally we are very interested to see if Recon’s drilling campaign can be successful:

88E is farming into an onshore Namibian asset next door to Recon Africa
88E is farming into a 45% interest in ground in the same region as Recon Africa. The ground was picked up in 2018, well before any of the major discoveries made in offshore Namibia.

Source: “Reasons We Invested” Section - 88E Investment Memo 20 May 2024

We also listed one of the reasons for Investing in 88E was the market response to Recon’s initial Namibian onshore projects.

Namibian onshore peer re-rated by over 40x
ReconAfrica drilled its first well at its onshore Namibian project back in 2021. Between 2020 and 2021 Recon’s share price went from CAD$0.30 to CAD$12.50+.

Source: “Reasons We Invested” Section - 88E Investment Memo 20 May 2024

Recon rallied to >$1BN last time it drilled - 88E to drill in 2025

From 2019 through to 2021 Recon went from licence renewals to its first drill program.

During that period Recon rallied from a COVID low of ~CAD$0.30 to a share price >CAD$12.

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.

So the big run up in Recon’s share price started when its licence was renewed in early 2020 through to its first well in April 2021.

We think 88E is in a similar position to where Recon was back in early 2020.

88E recently got its licence renewed and then today kicked off its first 2D seismic program.

By the end of 2024, the seismic is expected to be completed.

In the second half of 2025, 88E expects to drill its first well.

So 88E is doing all of the work that Recon did (starting in late 2020 and ending with the drill programs in mid 2021).

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.

When it comes to oil and gas drill programs, we generally see an increase in investor interest/marker interest as the drill date gets closer.

As drilling and results approach, interest and excitement build in the lead up to drilling results, and speculators may enter the stock expecting a positive result - it usually looks something like this:

It’s important to note that increased excitement/interest shown on our chart below does NOT necessarily correlate to share price increases, which depends on many other factors and broader market conditions

It's something we have built our Oil and Gas Investment Strategy off.

The high level expectation is to see a share price start off low while the company does all of the technical work (permitting/seismic/mapping) and then starts to move higher when the drill bit starts turning.

Here is where we think 88E sits on that chart for its Namibian asset:

We are hoping 88E follows that trajectory going into its first well at its onshore Namibian asset.

AND we hope 88E delivers a discovery which keeps its share price up...

A discovery on its Namibian asset is a catalyst we hope helps 88E achieve our Big Bet which is as follows:

Our 88E Big Bet:

“88E re-rates to a $500M market cap after commercialising its Alaskan assets (through a takeover or farm-out deal) OR by making a discovery at its Namibian asset”

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.

Background on 88E’s Namibian farm-in deal

88E’s asset was picked up by the JV partner Monitor Exploration back in 2018 - way before any of the major offshore discoveries were made in Namibia in 2022.

See the Monitor guys run through a pretty detailed presentation on the assets that 88E is farming in the video below - Invictus Energy investors may recognise Robin Sutherland - Robin sits on the board of Invictus, and is the Technical Lead for Monitor Exploration:

(Source)

Since 2018, Monitor has run airborne geophysics and used existing 2D seismic data to map out 10 different leads across the project area.

88E is now coming in to fund more seismic and two wells - at the moment 88E owns 20% of the project. After the first two wells are drilled, 88E will hold 45%.

So at the moment, 88E has already paid for its share of the seismic program.

Recap - Why we like 88E’s Namibian asset:

• Huge ground position - ~70x the size of 88E’s Project Phoenix in the North Slope of Alaska, USA. The project is large enough to host a large resource base.
• Namibia’s fast developing oil and gas industry - recent giant discoveries offshore by TotalEnergies and Shell have put Namibia on the map. Namibia being touted as the “next Guyana” where US supermajors Exxon and Hess are making discovery after discovery.
• Namibian onshore peer re-rated by over 40x - ReconAfrica drilled its first well at its onshore Namibian project back in 2021. Between 2020 and 2021 Recon’s share price went from CAD$0.30 to CAD$12.50+.
• Project vendors linked to Invictus Energy (ASX: IVZ) - IVZ director Robin Sutherland is a part of the team doing the deal with 88E. Robin was also involved in EnergyAfrica, which sold to Tullow Oil for $500M in 2004 and then again with Tullow Oil as it went on to make discoveries across East Africa.
• Early stage with plenty of upside - 88E is getting in on the project at a very early stage. There is scope for 88E to run the seismic surveys, define a large prospective resource and firm up a drill program over the next 12-24 months.
• Strategically located - Sits next to one of Africa’s largest economies, South Africa, which is looking to replace its retiring coal-fired energy generation fleet.

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

88E’s Project Leonis in Alaska - farm out next?

88E recently released a maiden internal Prospective Resource estimate for one of its Alaskan oil and gas projects.

The resource estimate was for Project Leonis, which 88E has a 100% ownership.

Leonis is separate from 88E’s Project Phoenix where the company was drilling/flow testing earlier in the year.

At Leonis 88E has defined a 381 million barrel prospective resource for the project (net to 88E).

Next at Leonis, 88E is working on what it is calling a “targeted farm-out”.

88E has previously mentioned that London group Stellar Energy Advisors were working on the farm-out deal and said that they already had “multiple parties” showing interest in the project.

As we pointed out above, 88E has a 100% working interest on this asset, so has the ability to farm down a portion of its ownership in order to fund drilling.

88E’s goal is to drill Leonis in either 2025 or 2026.

It's already got a location to drill a well called the ‘Tiri-1 exploration well’

The well will be designed to drill, log and test 88E’s target zone in a single season, utilising an existing gravel pad at the location of a historic well, to reduce costs:

Why Project Leonis caught 88E’s attention

88E picked up Project Leonis back in April last year.

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

At the time of acquiring the project 88E knew that:

• The project was fully covered by existing 3D seismic data, AND
• The project had historic exploration data from the Hemi Springs Unit #3 well drilled by ARCO in 1985.

Since then, 88E updated its understanding of the project by:

1. Reprocessing seismic data - improving the quality and resolution of the data to define the prospective areas inside the project
2. Re-analysing all the data from the Hemi Springs Unit #3 well - so far 88E has calculated >200ft of net pay across one reservoir (USB) and is working with a theory that the field could be similar to the already producing fields to the north (Polaris, West Sak, and Orion fields).

The latest from its other Alaskan assets

In a June announcement, 88E confirmed that in Alaska the focus was:

1. Project Phoenix - where 88E recently declared a discovery and ran a relatively successful flow test flowing oil to the surface from multiple reservoir targets.

88E is aiming to drill horizontal production wells and generate cash flow within the next 24 months.

2. Project Leonis - the asset that 88E recently put out a maiden prospective resource estimate on.

88E is seeking to farm out a portion of the asset in order to drill an appraisal well.

88E also said that it would look to divest or relinquish its other assets (Umiat and Icewine West) this year.

We don't mind the move to let go of some projects, given that 88E is a relatively small company and has enough on its plate with the Alaskan assets and its farm-in deal in onshore Namibia.

What’s next for 88E?

In the short term we want to see 88E achieve two of the key objectives we set for the company as part of our 88E Investment Memo:

Objective #1 of our 88E IM: Contingent resource estimates at Project Phoenix, USA

Milestones
🔲 Contingent resource estimate #1 (SFS Reservoir)
🔲 Contingent resource estimate #2 (SMD Reservoir)

Objective #2: Farm-out/development studies for Project Phoenix, USA

Milestones
🔲 Farm-out/JV MOU
🔲 Binding farm-out/JV deal
🔲 Capital light development studies

Objective #3 of our 88E IM: Farm-out Project Leonis, USA

Milestones
✅ Maiden prospective resource estimate
🔄 Farm-out/JV MOU
🔲 Binding farm-out/JV deal

Objective #4: Firm up drill target at the Namibian asset

Milestones
✅ 2D seismic program starts
🔲 2D seismic program completed
🔲 2D seismic results & interpretation
🔲 Maiden prospective resource estimate
🔲 Primary drill target selected

Our 88E Investment Memo - why did we Invest?

You can read our Investment Memo in the link below. This memo provides a short, high-level summary of our reasons for Investing. We use this memo to track the progress of all our Investments over time.

Our most recent Investment Memo on 88E was written on 20 May 2024.

Read our 88E Investment Memo here.

In our 88E Investment Memo you can find:

• What does 88E do?
• The macro theme for 88E
• Our 88E Big Bet
• What we want to see 88E achieve
• Why we are Invested in 88E
• The key risks to our Investment Thesis
• Our Investment Plan