EXR drilling for gas in the coming weeks…

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 4,777,858 EXR shares and 1,071,429 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.

Big oil and gas drilling events get the blood pumping.

It’s a potent mix of emotions.

Company making results are what we want - but hard to come by - and the market can swing from greed to fear and back again in the space of a day.

These kinds of major catalysts are rare and bring the potential of big rewards - along with significant risks.

Earlier this morning, our energy Investment Elixir Energy (ASX:EXR) revealed that it is now just weeks away from drilling its gas project in Queensland, Australia.

EXR will be drilling an appraisal well into a ~395 billion cubic feet contingent resource - surrounded by oil & gas giants Santos and Shell.

EXR’s drilling event is one of three big drilling events we are Invested in going into Christmas.

Needless to say, cortisol levels are high right now.

We’ve got the backdrop of Invictus Energy being ~13 days away from delivering a result, and Noble Helium spudding its Tanzanian helium well potentially any day now.

And then there’s EXR.

One big drilling event is usually enough excitement for the nerves, but 3 drilling events so close together is intense if you are invested in all three.

By Christmas we will either be investing geniuses or licking our wounds and planning the next rolls of the dice for 2024...

Of course, with these kind of risk/reward stocks, only invest what you can afford to lose. Always speak to a professional investment advisor and make sure you consider your own risk profile and financial circumstances before investing.

With EXR about to start drilling, the oil & gas macro thematic is looking strong for the medium term.

During the back end (hopefully...) of bear market conditions, certain market sectors start to suddenly launch back into favour.

A few weeks ago, it was uranium when the market realised the spot price was breaking out above 20-year highs.

All it takes is for a short, sharp increase in the underlying commodity price and the whole sector can see a wave of capital flow into it.

(including small caps stocks)

AND they can start before the market has any time to process why...

So could we see an oil & gas run?

Back in the 1970s instability in the Middle East took the oil price from ~US$3 per barrel to ~US$40 per barrel.

Then in the late 2000s supply concerns took it from ~US$30 per barrel to US$140 per barrel.

Oil and gas prices are prone to rallying when there is geopolitical instability - just like what we are seeing in the Middle East and in Russia/Ukraine right now.

We have already started seeing oil and gas prices have started creeping higher - up over 30% in the last few months.

There is a chance history repeats itself and prices rally to levels a lot higher than where they are now.

This sets the scene for a confluence of events that could deliver big share price re-rates for oil & gas explorers that deliver big material drill results.

Today, EXR completed all of the well pad and infrastructure upgrades.

EXR expects to be drilling in the “first few weeks of November”.

EXR will be drilling an existing contingent resource estimate of ~395 billion cubic feet of gas - meaning the company already knows there is gas there.

Because the project has a “contingent” resource - EXR’s well is technically an appraisal well - targeting a known gas discovery.

While we already know there is gas there, the upside for EXR is the ~3.3 trillion cubic feet prospective resource - meaning there is scope for that resource to grow.

The project is next door to oil and gas majors Santos and Shell.

In fact EXR’s Daydream-2 well sits only ~5km away from Daydream-1 where Shell holds a previous discovery made in the same system.

Ultimately, EXR is hoping to replicate the success’ shell had only 5km away.

EXR’s Daydream-1 similarities to Shell’s Daydream-2

The Daydream-1 well was drilled by BG Group (now Shell) ~10 years ago, just ~5km away.

Daydream-1 was drilled to a total depth of ~4,140m and produced flow rates of ~3.5Mcf per day, which today would be considered commercially viable.

10 years ago there was far less appetite to develop gas projects along the east coast of Australia.

Now the east coast is expected to have momentary supply shortages starting in 2027.

EXR’s drill design is almost identical to Daydream-1.

EXR will be drilling down to a total depth of ~4,200m targeting the same reservoirs.

Ultimately, EXR expects to hit gas, the main goal will be to find enough indications of gas to move through to completion and a flow testing program.

The following video provides an easy-to-understand overview of EXR’s upcoming well:

(Source)

EXR’s team have “been there and done it” all before...

One of the key reasons why we are backing EXR to deliver success with Daydream-2 is because of its management team.

• Managing Director Neil Young is ex-Santos management.
• Director Stephen Kelemen ran Santos’ Coal Seam gas portfolio.
• And EXR’s chairman Richard Cottee is seen as “the Godfather” of Coal Seam gas in QLD

Cottee took Queensland Gas Company from a $20M capped junior through to a $5.3BN takeover back in 2008.

Interestingly, it was BG Group who took over Cottee’s old company.

The same company that initially made the Daydream-1 discovery ~5km away from EXR’s well back in 2012.

(Source)

EXR’s project is also in a position where if the project is commercially viable it could be put into production relatively quickly with all of the existing infrastructure in the region.

The proximity to other projects and infrastructure is one of the key reasons why we think there is a chance that EXR’s project gets put on the radar of the majors surrounding it.

Obviously though, first EXR will need to demonstrate its project is commercially viable.

What do we want to see from EXR’s Daydream-2?

EXR has split its drill program into two stages.

First will be the drilling of the well this year, where EXR will be looking to confirm how big the reservoir units are & learn more about the geological conditions of the project.

Then the second stage will be all about stimulating and flow testing the well - which EXR expects to be in mid-2024 sometime.

Across the two stages we want to see EXR:

• Prove commercially viable flow rates - Commercially viable flow rates would signal to the market that the project can be developed into a producing gas asset.
• Book a maiden reserve number - EXR will be looking to convert some of the existing contingent resource into the reserve category. Booked reserves typically mean commercially developable resources.
• Increase its contingent resource number - There is also a chance EXR converts some of the ~3.3 Tcf prospective resources into the contingent category - increasing its overall contingent resource.

🎓To learn more about reading oil & gas resources read: How to Read Oil & Gas Resources

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’s next for EXR?

QLD gas project

🔄 Rig mobilisation on site

🔲 Spud the Daydream-2 well

Mongolian Coal Bed Methane (CBM) gas project:

🔄 Extended production testing

🔄 2023 exploration program

Mongolian Green Hydrogen Project:

🔄 Financing for a pilot plant

🔄 Offtake agreement for the pilot plant

🔄 50/50 Joint Development Agreement (JDA)

What are the risks?

With drilling in Queensland now weeks away, the key risk for EXR’s Daydream-2 well is “commercial risk”

The drill program may fail to prove commercially viable flow rates.

Uneconomic flow rates would mean EXR spends a lot of capital for very little return in terms of shareholder value, which we think would lead to a re-rate down in EXR’s share price.

Oil and gas exploration and appraisal drill programs are high risk / high reward and so there is always a risk the company’s share price re-rates materially lower off poor drill results.

To see all the risks to our EXR Investment thesis, check out our EXR Investment Memo here.