EXR delivers commercial gas flow rates - 5 more zones still to be tested

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 4,016,000 EXR Shares and 1,506,429 EXR Options at the time of publishing this article. The Company has been engaged by EXR to share our commentary on the progress of our Investment in EXR over time.

A stabilised commercial flow rate of 2.5 million cubic feet of gas.

And a peak flow rate of 3.5 million cubic feet of gas.

And there are five more zones still to flow test next...

Today’s post stimulation flow rate from a single zone is almost double the unstimulated, stabilised flow rate Elixir Energy (ASX:EXR) announced from the same zone back in April...

Which saw EXR’s share price run to 17.5c... before an equipment issue delayed the tests... until now.

EXR closed yesterday at 11c/share...

Today’s newly announced commercial flow rate is from just ONE out of 6 zones being stimulated and flow tested over the coming days.

(it was the deepest zone where EXR unexpectedly hit free gas.)

There are still 5 more unconventional zones remaining to stimulate and flow test.

Across the whole project, EXR has a 1.27 trillion cubic feet contingent resource.

So if these 5 unconventional zones can ALSO deliver a commercial flow rate, then it could imply EXR’s project is commercially viable as a development project.

Plus with the unexpected, added bonus of a commercially flowing deeper free gas zone, where the full potential is still unknown.

(meaning it might just a small isolated gas pocket OR it could significantly extend and be a major free gas discovery)

So it's going to be a big couple of weeks of news flow (...get it?) for EXR.

Today our 2019 Energy Pick of the Year, EXR published flow test results from its 100% owned onshore gas project in Queensland.

Today's results of a stabilised flow of 2.5 million standard cubic feet of gas improved significantly on the initial stabilised flow rate of 1.3 million standard cubic feet EXR delivered from the conventional gas zone of its well back in April.

Next, EXR will test the unconventional sections of the well.

This next phase of testing is important as a successful flow rate here would add additional scale to the project.

And that is what the major players want to see.

There are likely to be lots of eyes on this flow rate.

EXR’s project sits right next door to majors Shell and Santos, as well as Omega who is backed by Tri-Star group (a private company owned in part by the billionaire Flannery family).

Considering EXR has already hit the commerciality threshold of 2.5 million cubic feet of gas from today’s results, the next phase of work will just be upside to what are already strong results.

De-risking the project with commercial flow rates will also be good for corporate interest in the project.

EXR’s project sits around existing pipeline infrastructure, existing gas power plants and an underutilised LNG export terminal.

We think the proximity to markets and infrastructure add to the value of a commercially flowing gas project in this part of Australia.

Taylor Collison analyst Andrew Williams recently published a report on EXR earlier this week (before today’s news) which set the stage for what the upside potential could be for the company on a successful flow test program:

In the note, Williams mentions that EXR is currently trading “capitalisation reserves metric of $0.08/g” based on its 1.27 TCF contingent resource and that a success case with the flow test could re-rate that to a level more in line with its pre-development or small scale peers...

The re-rate would be by ~3.5 to 5.6x... with a share price range of 27c to 58c per share... (if a flow rate is successful).

Of course, at the same time it’s important to note that analyst price targets are based on a number of assumptions that may not prove correct. Never rely solely on a price target to make an investment decision. Do your own research before making an investment.

The report from Taylor Collison lays out the EXR upside scenario, along with the risks.

You can read the full report here: Elixir Energy Limited (ASX:EXR) Taylor Collison Report

How do these results fit into EXR’s program?

What we wanted to see from EXR’s program is a flow rate, and a good one at that.

So far, EXR has been able to deliver on this, announcing today that it achieved stabilised flow rates of 2.1 and 2.5 mmscfpd.

This is materially better than the stabilised flow rates achieved in April when the first flow tests were done.

There is still more to come.

EXR will now move to stimulating and flow testing the unconventional coals in its well.

This part of the well is where the majority of EXR’s contingent resource sits.

This is the part of the project where the majors are likely to show the most interest, as any flow rate here adds scale to the project’s potential

For context - the unconventional reservoirs are the same ones that everybody else in this part of QLD (Shell, Santos, Omega) are working on.

The target for the program is to hit a combined flow test across all reservoir’s above 2.5 million standard cubic feet per day (mmscfpd).

That is the number EXR published prior to flow testing as enough to consider the well commercial in the current market environment.

EXR was able to achieve this target flow rate just in the conventional/free gas zone alone.

And engineering calculations suggest that with the appropriate completion string in the hole, the well would flow at a stable rate of 3.0 mmscfpd.

Going into the first phase of the flow test back in April we set the following expectations across all reservoirs:

• Bull case = >5mmcf per day flow rate
• Base case = 2-5mmcf per day flow rate
• Bear case = <2mmcf per day flow rate

So far EXR has already hit our “base case” scenario, and may even achieve our “bull case” scenario depending on how well the next phase of the flow test goes.

There is still plenty of scope for EXR to work up the well and get a bigger flow rate in the future.

The current program is just testing just ~19% of the wells' gas-bearing zones, meaning that there is optionality for EXR depending on the results of the program.

Here is great explainer video of EXR’s program:

(Source)

As mentioned in our last note, our bull/bear/base case expectations are largely based around results from other unconventional projects in Australia.

For example Tamboran Resources is developing its gas project in the Northern Territory in a location that is far less developed than the area that EXR is drilling in.

The company is getting flow rates of ~5.2 to 6.4 mmcf/day of flow in horizontal wells (on a 1,000m lateral basis).

Tamboran is currently capped at around $308M.

EXR is drilling a vertical well, and the infrastructure around its project means that there are lower flow rate hurdles needed to develop a project.

We think that the results today, and potentially the future results to come, will set the stage for key partnership interest in EXR’s project.

EXR has previously mentioned it aims to “gather data for a 500 well development”.

Remember, there are a lot of big players in the region who are likely closely watching the results of EXR’s flow test.

It’s possible that one of them could become EXR’s new commercial partner and/or seek to consolidate their position in the region if they like what they are seeing.

Or there could be a completely new entrant to the region wanting to secure a commercial gas resource here.

Last week we published a deep dive into EXR and its project, including:

• A reminder of EXR’s Queensland gas project
• The upcoming flow program, what do we expect?
• Majors are active in this part of Queensland
• EXR has the right team to make it happen
• East coast gas macro investment thematic

You can click through each of the above to skip to the relevant sections or you can read the full note here:

Today’s results go a long way towards EXR achieving our March 2023 “Big Bet” which is as follows:

Our Big Bet for EXR:

“EXR to achieve a $1BN market cap through successfully advancing one or more of its three projects: its Mongolia gas project, Mongolia green hydrogen project, and/or its Queensland gas project.”

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 EXR Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

What is next for EXR?

🔄 Flow test results

EXR will continue to update the market on the progress of its flow test program.

We expect the next update to be around the perforation, stimulation and flow testing of the unconventional coals from its well.

Flow test results from the coals could come out any time within the next four to five weeks, so we will be watching EXR closely over that time.

What could go wrong?

The key risk for EXR is still exploration risk.

Although EXR published some promising results today, there is no guarantee that EXR can achieve the desired flow rate from the other zones.

Exploration risk

There is risk that EXR does not achieve a reasonable flow rate from appraisal drilling at its Daydream-2 appraisal well at its Queensland gas project.

Source: “What could go wrong” section - EXR Investment Memo 29 March 2023

Another risk to watch out for is “risk of mechanical failure”.

Things can and do go wrong with drilling, earlier this year EXR’s flow test was delayed due to mechanical issues with the well.

Any delays caused by mechanical failure will be a set back for EXR.

To see all of the risks specific to EXR read our EXR Investment Memo.

Our EXR Investment Memo

Our Investment 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.

Below is our EXR Investment Memo, where you can find the following:

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