88E / EEENF: Drilling underway

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 32,835,000 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.

It’s spudded.

Our oil and gas exploration Investment 88 Energy (ASX:88E | OTC: EEENF) has just started drilling its Hickory-1 well on the North Slope of Alaska, USA.

88E is drilling into a 647 million barrel prospective mean unrisked resource (net to 88E) across six stacked targets.

Over the coming weeks we will be learning about how much of this prospectivity could result in an economic hydrocarbon discovery.

Given the amount of data including 2D and 3D seismic, and previous drilling in the same targets and near this well, its 88E’s lowest risk well from a technical perspective.

The goal with this well is less about making a new discovery, and more to prepare for a flow test in the next drilling season.

Over the coming weeks, we expect to get regular newsflow on drilling progress and observations of what 88E is drilling through (we hope lots of oil).

Here is the expected timeline for 88E’s drilling:

1. Drilling started today - 10th March 2023. ✅
2. Drilling to 3,500 feet - two weeks.
3. Drilling to total depth of up to 12,500 feet - two more weeks to drill through all six reservoir targets.
4. Wireline logging to target depth - straight after drilling is complete.

88E will be running logging while drilling, which involves gathering down hole data while drilling continues — so we should expect some updates on prospectivity across the six targeted reservoirs during drilling.

The wireline logging data will be used to plan for the flow test later this year / early 2024.

88E drilling underway - What we will be looking out for during drilling

We will be watching for the following data from 88E during and after drilling that will help indicate whether drilling is going to be ultimately successful:

• Fluorescence - an indicator of oil presence;
• Oil odour in samples;
• Mud gas readings - hopefully, elevated;
• Net pay/gross pay numbers - an indicator of the size of the reservoirs; and
• 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.

Considering 88E has decided to flow test this year's well at a later date, our bull/bear case expectations for this well are relatively simple:

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

The ultimate commercial viability of the well will be determined by the flow test that 88E plans to run in the 2023-24 Alaskan drilling season.

Given 88E’s two stage approach to the Hickory-1 well, we are conscious of the possibility that the share price reaction (positive and negative) may be split across the two major events.

The most recent video released by 88E is a nice short sharp summary of the Hickory-1 plan:

88E’s goal with the current drilling

With drilling now underway, we think it’s important to set the context and establish what 88E is looking to accomplish with this year's well.

88E’s not alone in exploring this area - 88E’s Hickory-1 well is adjacent to UK listed Pantheon Resources ground.

Pantheon has been actively exploring near 88E’s ground for a few years, and off the back of exploration success its market cap rose from ~$60M to a peak of just under $2BN.

However, since its multi-billion dollar highs, Pantheon's share price has recently taken a major hit after news from the company's Alkaid-2 production test.

While the market reaction was negative to Pantheon’s most recent results, in our opinion the news has very little impact on the prospects of 88E’s Hickory-1 well.

This is because Pantheon was production testing a different reservoir unit to the one 88E is targeting.

In fact, Pantheon even mentioned in the latest update that it is switching its focus back on the Shelf Margin Deltaic (SMD) reservoir units - which are in fact 88E’s primary, and shallowest targets.

The following is a quote from Pantheon’s press release: “The data collected indicates the SMD has significantly better reservoir qualities than the Alkaid anomaly”.

The SMD reservoirs make up half of 88E’s Hickory-1 targets and are considered the “primary targets” for the upcoming well.

Interestingly, the bulk of the rally in Pantheon’s share price came back in 2021 after the company drilled the SMD reservoir units on the Talitha-A well.

The below map shows the location of 88E’s Hickory-1 well, Pantheon’s Talitha-A well, and its proposed Talitha-B drill location.

Independent reviews of the 3D seismic data have interpreted the reservoirs Pantheon drilled at Talitha-A extend into 88E’s ground.

The key takeaway is that Pantheon are heading closer to 88E’s Hickory-1 well location on their next well, and want to go for those SMD units again that it successfully drilled.

What could success look like for 88E? A comparison with the last time this stock 10 bagged

The last time we saw an extreme run up in the 88E share price was back in 2021 when the company drilled its Merlin-1 well.

Back then, markets were a lot more bullish, interest rates were near zero, and there was no “inflation problem”. They were definitely happier days for speculative stock investors.

The confluence of strong market sentiment and 88E’s exploration drilling saw its share price run from ~0.8c per share to nearly 10c per share, a return of more than 1,000% at its peak.

So whilst the macro conditions are different to 2021, it’s worth comparing how each well stacks up from a technical perspective now that Hickory-1 has spudded:

For all of the above, from a technical perspective, 88E’s Hickory-1 well is the lowest risk since we first Invested in the company.

Whilst the macro environment for riskier stocks is more subdued than the heady days of 2021, we are still very curious to see what unfolds over the coming months for 88E investors.

So this low risk well from a technical perspective does needs to be balanced against some other factors:

• 88E isn't running a flow test until late 2023/early 2024. So even in a success case, the market may not re-rate the stock fully until it sees positive flow rate results. Think of this as a two episode event.
• The share price run for the Merlin-1 well was during the post-COVID 2021 euphoria where almost every speculative stock went on a run. There is less appetite for risk in the markets right now.
• Even though 88E is drilling an appraisal well (targeting reservoirs where oil shows have previously been identified), drilling is risky business and there is always a chance the company finds nothing of commercial value.

In any case, we hope the factors above that differentiate the Hickory-1 well from the Merlin-1 well lead to 88E delivering on our Big Bet for the company:

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:

See our 88E Progress Tracker here:

Update on our Investment Plan

For 88E’s current drill program, we have followed our standard Investment Plan for large oil and gas drilling events.

We Invested well ahead of the drill program and now hold a position that we are comfortable with going into the drill program.

While the share price is up slightly from where we made our Investments, we didn’t see the large run up that we typically see when 88E gets closer to drilling.

Now that drilling is underway, we expect most of the buying in 88E shares to come during the drill program, ahead of drilling results.

88E’s drilling is fully funded after the company’s recent $17.5M capital raise, so the only way investors can now buy into a potential successful drilling outcome is to buy shares on market.

We also think that whilst the share price hasn't run up considerably, there has been enough time for investors to de-risk their holdings since the last capital raise which was done at 0.95c per share.

~1.8 billion shares were issued from the last raise on the 14th of February. Since then 88E has seen 1.4 billion in share volume traded, meaning there have been opportunities for those who purchased shares to sell portions of their holdings for a small profit prior to drilling if they wanted to.

We now expect to see a period of excess demand and limited supply for 88E shares while drilling:

• Excess demand: As investors speculate on the potential success of the drill program and seek exposure to the outcome, buying shares on market starts to increase.
  
  
• Limited supply: Investors look to hold onto some portion of their position to have exposure to the upside should 88E make a new discovery.

Our plan is to hold the majority of our position and wait for the share price to hopefully move higher.

Drilling is expected to take four weeks to complete, after which the company will run a wireline logging program.

Our plan is to consider selling some shares only if the share price runs between now and the drill results.

In an ideal world, we would like to be Free Carried before 88E announces its 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. Seek professional investment advice when investing in high risk small cap exploration stocks.

Where to watch for fluctuations in 88E’s share price across the planet

With drilling now underway we will be keeping an eye on the 88E share price across the three markets it is listed on to see if there are any major fluctuations we might not see on the ASX.

Below are links to the three:

🇺🇸 (OTC: EEENF) US OTC listing

🇬🇧 (AIM: 88E) London AIM listing

🇦🇺 (ASX:88E) Australian ASX listing

Acreage Update for Project Phoenix

Last week 88E also put out an update on the status of its Project Phoenix acreage.

The Alaskan Department of Natural Resources (DNR) approved a “unit application” for the company’s leases covering the central and western areas of Project Phoenix.

The “unitisation” news is important because it gives 88E tenure through to 2028 and provides for a clearer forward exploration plan over its ground at its Project Phoenix.

For a project area to be considered for “unitisation”, the department typically considers whether a particular area has the potential to host an oil and/or gas project.

It means that the Alaskan regulators consider that there is potential for the project area to contain “all or part of an oil and/or gas reservoir and potential hydrocarbon accumulations”.

Relying on the 2D and 3D seismic data available as well as both 88E and Pantheon's wells, the decision to unitise this part of 88E’s project is another independent tick of approval as to the prospectivity of its ground.

The second key takeaway from the unitisation of 88E’s ground is that a forward exploration plan has now been set in place as follows:

• Further reviews of the Franklin Bluffs 3D data. This is to determine optimal drilling locations for future exploration and appraisal wells.
• Drilling of the Hickory-1 well & subsequent flow testing. 88E is set to drill Hickory-1 in early March and expects to be flow testing in late 2023/early 2024.
• Next well location set. If the Hickory-1 well is a success, 88E can then move its rig to the Icewine-1 well pad and re-enter that well with a view of running a short term production test, OR drilling and flow testing with a new appraisal well at the same location.
• Horizontal production test at Hickory-1. If drill and flow test results are positive, 88E can complete a horizontal well and run an extended flow testing program.
• 2D seismic over the remaining eastern portion of the acreage. If the Hickory-1 well is a success, 88E could run non-drilling activities including 2D seismic over the eastern portion of its acreage.

See our Quick Take on that news here: Permitting update at 88E’s Project Phoenix

What’s next for 88E?

🔄 Drilling of 88E’s Hickory-1 well

Drilling commenced today, the drilling timeline is as follows:

1. Drilling started today - 10th March 2023. ✅
2. Drilling to 3,500 feet - two weeks.
3. Drilling to total depth of up to 12,500 feet - two more weeks
4. Wireline logging to target depth - straight after drilling is complete.

What could go wrong?

Drilling is now underway meaning the key risk for our Investment is “Exploration risk”.

Oil and gas exploration can be rewarding for Investors but more often than not drill programs fail to deliver anything of significant value.

Drill programs also bring with them operational/technical issues, over the decades we have been Investing we have seen it all - drill rigs getting stuck in wells, equipment failures and suspended drill programs due to rig failures.

As a result, we are always conscious of the probability that things could go wrong and the 88E share price could de-rate significantly off the back of poor drilling results.

Exploration risk is therefore one of the key risks 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

The ultimate purpose of our Investment Memo is to record our current thinking as a benchmark to assess the company's performance against our expectations 12 months from now.

In our 88E Investment Memo, you’ll find:

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