GGE re-entering its USA helium discovery well - can it deliver a flow rate?

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 45,011,058 GGE shares and 5,000,000 GGE options at the time of publishing this article. The Company has been engaged by GGE to share our commentary on the progress of our Investment in GGE over time.

It’s time to go back in.

Last year Grand Gulf Energy (ASX:GGE 🇦🇺 | OTC: GRGUF 🇺🇸) made a helium discovery on its USA project.

On its Jesse 1A well, GGE intersected a gas column of over ~61m, with ~31m of net pay.

GGE hit helium grades of 1% - similar to the grades seen in the Doe Canyon helium field nearby which is the second biggest discovery in the US over the last ~70 years.

However - at the time, it was unable to get any commercial flow rate from the well.

The entire wellbore appeared ‘gas saturated’ - which is good - BUT produced formation waters were fresher than regionally observed - leading to an analysis that the lower zones are potentially water bearing.

GGE has spent the last few months with top tier US drilling experts and consultants to come up with a plan to extract maximum value from its 12.7 billion cubic feet prospective helium resource.

The decision has been made to do a low cost ‘well re-entry’ on Jesse 1A, seal off that lower water bearing zone, and run a flow test on the upper zone.

Ultimately the primary objective for the well re-entry will be to prove GGE’s well can flow helium consistently.

One of GGE’s contractors Blade Energy Partners thinks GGE could produce “potential flow rates of 5 million standard cubic feet per day (MMscfd) of raw gas”.

If GGE can get commercially viable flow rates from its well, the well could be plugged and set aside as a future producer which COULD get GGE into production quickly.

Like all gas exploration, it's a high risk, potentially high reward operation, and whatever the case, we would expect to get some results over the coming months following the well re-entry.

The drill rig was mobilised yesterday, and based on this we would expect the operations to commence on site any day now.

GGE is capped at only $14.6M but could be a few weeks away from demonstrating that it could put its helium discovery into production.

Given GGE has been unable to deliver an outsized success on their first few drilling attempts, we think the impatient market is pricing in failure at the moment...

That puts GGE in a position where positive material news to the upside could deliver an unexpected win to the market - usually when that happens a company’s share price re-rates to the upside.

Structural helium deficit in the USA? A nice time to own some

Before we dive back into GGE’s imminent flow testing operations, let's take a quick look at the macro forces at play in the helium market.

For the best part of a century, the US has been the world's biggest supplier of helium.

But over the last few decades, helium supply dominance has slowly shifted to countries like Qatar and Russia.

The US government is about to exit from the helium industry altogether, as it is looking to sell off its federal helium reserve:

(Source)

After the Russia/Ukraine war broke out, the global helium supply chain was hit even harder and subsequently helium prices have gone on a run, despite being a relatively opaque market .

For eight of the last ~17 years the helium supply chain has been one of the most fragile in the world, experiencing shortages on a regular basis.

At the same time, helium is an important input into some industries we take for granted like MRI’s and semiconductors.

Without helium, the semiconductor supply chain falls apart and MRI machines aren't able to operate.

The focus for the US government right now is the semiconductor supply chain - At the moment ~56% of the world’s chip supply comes from Taiwan.

The US government is trying to change that by throwing ~US$52.7BN in funding at chipmakers encouraging a reshoring of manufacturing plants.

All of the big chipmakers like Samsung and Intel have already committed to ~US$260BN in new plant builds - ALL of which will need domestic helium supply.

This is where GGE finds itself - looking to become a helium producer in the USA, where billions of dollars are being invested in semiconductor plants, that all require a secure, reliable supply of helium.

Where GGE is at right now

Yesterday, GGE started mobilising its drill rig ahead of a re-entry program at the well where it declared a helium discovery in Utah, USA.

Here’s a quick recap of what GGE already has in and around its project:

• Existing helium discovery with grades at ~1% - GGE’s project has a 12.7 billion cubic feet unrisked prospective helium resource. The helium price is around US$500/mcf at the moment.
• Next door to the USA’s biggest helium field - GGE holds ~29,000 acres adjacent to the Doe Canyon helium field which produces ~50% of US helium supply.
• Existing infrastructure to bring its helium to market quickly - There is existing idle pipeline infrastructure in the area, and GGE has a binding offtake agreement with the owner of a local helium processing plant. GGE’s project is <20 miles away from 2 helium plants.

GGE is now days away from re-entering its discovery well, looking to flow test it and IF successful, prepare it as a future production well.

GGE first announced a discovery at the Jesse 1A well back in June 2022.

Since then, GGE has confirmed net pay of ~31m and helium grades up to 1%.

However a key thing missing at the time was a successful flow test that showed the well can produce helium consistently.

Then GGE drilled the Jesse-2 well, which produced a flow rate BUT fell short of production rates that would be considered “commercially viable”.

The primary issue for both wells was the water table at the bottom of the wells.

With the re-entry into Jesse 1A, GGE’s strategy is to isolate and cement in place the water wet lower Leadville reservoir so that the upper section can be flow tested.

Here is how it would look:

IF successful, GGE will be in a position where it can suspend the well as a future producer that can be tied into all of the existing infrastructure in the region and start generating revenues from.

GGE has been fine tuning its approach AND its team

Jesse 1A independently reviewed to confirm flow potential ✅

GGE had independent engineering contractors ‘Blade Energy Partners’ look at the Jesse 1A well and confirm it has potential to produce a flow rate.

The advice from Blade was to focus on “zonal isolation and stimulation” - exactly what GGE is planning to do with its Leadville reservoir.

Blade’s view was that the Jesse 1A well could produce “potential flow rates of 5 million standard cubic feet per day (MMscfd) of raw gas”.

Appointed experienced well engineering consultants ✅

GGE appointed Walsh Engineering to help manage on site activities during its next well.

Our key takeaway from that appointment was the experience Walsh had with the Tocito Dome helium field.

The Walsh guys did similar isolation/stimulation work on that field Which produces at 7-8% helium concentrations.

The Walsh team finished their reviews of the re-entry plan recently and have set it up so that GGE can isolate the lower “potentially wet” reservoir section so the rest of the reservoir can be flow tested.

Designed the completion/stimulation program ✅

GGE then brought on Haliburton to help design the completion/stimulation program.

Haliburton is actually the world’s second largest service provider to the oil and gas industry so they know what they are doing when it comes to getting projects producing.

At a very high level, Haliburton's job for GGE is to design the whole isolation/stimulation program where they work out where GGE should isolate first AND the type of chemicals GGE will use to get the reservoir flowing.

The process of isolating and stimulating specific reservoirs may sound complex but the oil and gas industry has been doing it for decades...

We are hoping Haliburton apply all of that O&G experience to GGE’s project and get the well flowing.

Interestingly, Haliburton has actually worked on the same Tocito Dome helium field that the Walsh team also worked on...

Jesse 1A independently reviewed to confirm flow potential ✅

Just this week GGE brought on Drake Well Services as the rig contractor - again another recommendation from the Walsh Engineering guys.

Drake is one of the biggest well service providers to the oil, gas and helium industry with over 54 years of experience in the industry.

They are also the same team who recently drilled and completed successful helium wells in another part of Arizona (Holbrook basin).

Team in place - ready for the re-entry program ✅ -

GGE has essentially spent the last ~12 months putting together a specialist team of consultants that have been doing well completion/stimulation programs for years.

And the company is now ready to execute its plan.

Instead of drilling a blind well and trying to flow test it on the go, we think the more methodical and planned approach could mean a higher chance of success when it comes to producing a flow rate.

Market expectations low for the re-entry program

We have been Investing in small cap companies for decades, and we’ve found that companies rarely ever smash an objective out of the park with its first or even second attempt.

Some do, many don’t, and some never succeed.

Typically we like to back our Investments for at least a few shots on goal in the hopes that the odds improve in our favour. The idea being that eventually the company figures it out and the patience is rewarded with a re-rate in the company’s share price.

The negative to this approach is that the company’s share price can swing up and down by a large % in the meantime.

The main positive, though, is that as the company runs into hiccups (as GGE did with Jesse-2 earlier this year), market expectations for the company to deliver a successful outcome become lower going into the company’s next round of drilling.

We think GGE finds itself in that position right now... where expectations for its next well are super low, and its share price is reflecting those expectations.

All that tells us is that, IF the company can deliver a positive outcome then the market will have an unexpected strong result sprung on it.

At the end of the day the market is all about expectations.

When they are low, and the market is surprised by the result we typically expect to see strong re-rates in a company's share price higher.

See how expectations can lead to re-rates in a company's share price here: Why do shares prices go up?

What do we want to see from GGE’s well-re-entry program?

Ultimately the primary objective for the re-entry program will be to prove GGE’s well can flow helium consistently.

Going into the program we have set up our expectations based on the performance of wells at the neighbouring Doe Canyon helium field and based on the estimates from GGE’s engineering contractor Walsh.

Our expectations for the Jesse 1A re-entry program are as follows:

• Bull case = >3 mmcf per day
• Base case = 1-3 mmcf per day
• Bear case = <1 mmcf per day

Ultimately, we want to see GGE prove it can produce helium consistently which forms the basis for our GGE “Big Bet” as follows:

Our GGE “Big Bet” -

“GGE makes a commercial helium discovery, ties it into the existing local processing infrastructure, and becomes a USA helium producer - or gets taken over.”

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 GGE 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 GGE?

Jesse 1A re-entry (December 2023) 🔲

We want to see GGE complete the re-entry program without any issues and produce a commercially viable flow rate.

Over the next few weeks, we expect to see the following announcements:

1. Re-entry begins
2. Updates along the way (reached X depth, Reached Y depth etc..).
3. TD (Total Depth) reached, and GGE starts preparing to run a flow test.

The final step will be for GGE to run its stimulation/flow testing program.

Below are our bull, base and bear case expectations for the flow test:

• Bull case = >3 mmcf per day
• Base case = 1-3 mmcf per day
• Bear case = <1 mmcf per day

What could go wrong?

Technical risk:

Being a re-entry into an old well the upcoming program could face more technical challenges than usual.

Drilling a well is pretty straightforward and the technical risks are mostly related to equipment failures/rig issues.

A re-entry into an old well is slightly different because hole conditions play a factor as well.

The hole conditions may have deteriorated since the Jesse 1A well was drilled and this could lead to challenges completing the re-entry.

Sometimes this can mean it makes more sense to re-drill a well than it would re-entering one.

We are hoping this isn’t an issue for GGE but are conscious of the risk.

Funding risk:

GGE is having a third crack at the same well, so any results at or below our bear case would most likely lead to re-rates lower in GGE’s share price.

GGE expects the program to cost <US$1M, which means the company shouldn't have any problems financing the re-entry, BUT it will mean funds run low after the program.

Ideally, we see a result at or above our base case, which leads to a re-rate in the company’s share price and gives the company an opportunity to raise more funds at a higher share price.

We have listed some more risks as part of our GGE Investment Memo here.

Our GGE Investment Memo

In our GGE Investment Memo, you’ll find:

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