NHE Reaches Total Depth: Announcement Explained

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 3,650,926 NHE shares and 2,437,037 options, and the Company’s staff own 54,339 NHE shares and 2,000 NHE options at the time of publishing this article. The Company has been engaged by NHE to share our commentary on the progress of our Investment in NHE over time.

NHE has reached target depth and is potentially days away from announcing a basin opening discovery IF they can get a helium sample to surface...

And so far, partial (ie: not yet finished) evaluation of wireline data has shown stacked formations with multiple helium shows above background levels in mudgas COINCIDENT WITH permeable sandstone reservoirs below clay seals.

All very positive...

But that's not how the market read this morning’s progress update from NHE...

Today’s Noble Helium (ASX:NHE) pre market open announcement was... a bit confusing?

Many investors’ default reaction to confusing announcements late in a drill program is always to sell first and ask questions later - given the binary nature of the drill programs.

But today’s reaction seems a bit overdone especially considering NHE is yet to sample the well and COULD still manage to declare a discovery by early next week...

NHE has now reached target depth faster than expected (this is good).

... and from reading the morning announcement NHE appears to still be “in the process of” evaluating the well (wireline testing and analysis)...

but not yet FINISHED the evaluation.

So by announcing an update part-way through the evaluation process, key information the market wants to see such as gross/net pay and some idea of the reservoir characteristics (porosity/resistivity etc) is not ready...yet.

Because this information was not included in the announcement the market probably assumed evaluation had finished and nothing was found...

Which is why we suspect NHE got sold off this morning.

(NOTE: At the time of writing this, NHE has released a clarification announcement confirming that testing is in fact NOT yet complete - so we still have a potential basin opening helium discovery to look forward to on this well in a few days time IF NHE can get a fluid sample to surface).

In exploration, “part-way through analysis” announcements are unusual and markets generally don’t like unusual stuff - especially this close to a binary drilling result.

There was actually some very good news in the morning’s announcement, it was just a bit ambiguously worded.

From this morning's announcement, NHE says INITIAL interpretation in the 8.5’’ section shows:

• Stacked, interbedded sandstone-clay formations
• with the multiple helium shows above background, detected in the mud gas,
• ..coincident with permeable sandstone reservoirs below clay seals

All very good.

And now “the wireline data are now being further studied to identify potential points for further gas and fluid sampling”.

When this wireline analysis is actually finished, NHE say they can then “identify potential points for further gas and fluid sampling, where feasible and appropriate”.

And this sampling will take “a number of days”.

Our interpretation is that this “sampling” will be the “fluid sample to surface” that will allow NHE to officially declare a basin opening helium “discovery”.

NHE has also released this video from drilling manager Dermot O'Keeffe on site, you can watch it here:

Typically, when it comes to big oil & gas drilling events it's not that difficult to predict what type of announcement will come next, and what is considered good, bad or ugly.

Usually, it is a process of:

1. Drilling starts.
2. Drilling updates along the way (reached X depth, Reached Y depth etc..).
3. Well hits TD (Total Depth) and is cased for testing.
4. Wireline logging tools are run and data analysed - this is where we expect to see gross/net pay and get some idea of the reservoir characteristics (porosity/resistivity etc).
5. Sampling tools are run - this is when the company tries to bring up a sample to surface so a discovery can be declared.

That is the typical approach we are used to seeing from companies drilling a first well on a new project.

We were expecting NHE to release the announcement (3) where it would say TD was hit and the well was cased for wireline logging to be run.

The title of the announcement was “Mbelele-1 reaches TD” and so when we saw an alert pop up this morning we thought it was exactly what we were expecting.

Instead, NHE came out with a bit of a combination of (3) and (4)...

NHE announced that TD was hit a few days ago and that preliminary results from the wireline logging indicated “stacked interbedded sandstone-clay formations” with helium shows.

NHE also said that the same formations were “coincident with permeable sandstone reservoirs below clay seals”.

Our key takeaways from this was that there potential zones of interest + helium in those zones + all the geological technicalities needed for them to deliver a decent result for NHE.

At a high level, it looks like a good progress announcement (albeit part way through what the market wanted to see), but the company’s share price was down 30% on open so the market had spoken...

We think it is because the announcement had too much detail for a TD announcement and not enough information for a wireline logging results announcement...

An inbetween that left the market sort of confused.

(NOTE: At the time of writing this, NHE has released a clarification announcement confirming that testing is in fact NOT yet complete - so we still have a potential basin opening helium discovery to look forward to on Mbelele-1 in a few days time IF NHE can get a fluid sample to surface).

Our thoughts on the announcement this morning:

First of all on the initial wireline logging data

The announcement sounded like NHE has only had a look at INITIAL interpretations of the wireline logging data.

Given TD was hit on the 31st of October and it's only been ~2.5 days since, there is a chance NHE may not have had time to evaluate all the data in full.

The company does mention wireline data is now “being further studied to identify potential points for further gas and fluid sampling”.

That sounds like a reference to the process of actually identifying gross and net pay numbers so there is a chance the company is actually doing that right now...

(NOTE: At the time of writing this, NHE has released a clarification announcement confirming that testing is in fact NOT yet complete - so we still have a potential basin opening helium discovery to look forward to on mbelele-1 in a few days time if NHE can get a fluid sample to surface)

Based on the market's reaction, it looks like many have interpreted that it’s already been done and nothing was found.

While we were initially confused too, it sounds to us like NHE is currently doing that work...

Second, on the multiple stacked targets

NHE mentions in today’s announcement that the initial interpretation “indicates stacked, interbedded sandstone-clay formations with the multiple helium shows above background”.

Here it sounds like NHE has definitely hit reservoirs of interest where helium is showing up.

A good sign and something that we would have expected to see from the wireline logging data.

Third, on what’s next for Mbelele-1

Today’s announcement briefly touches on what is next for the well at the end of the announcement.

NHE said “MDT sampling and mini-DST” runs would “take a number of days”.

This tells us that NHE is yet to test any of the reservoirs it has identified to date so there is no way for NHE to confirm any gas concentrations, helium grades OR declare a discovery... YET.

Again, the default reaction to confusing announcements late in a drill program is always to sell first and ask questions later - which is understandable given the binary nature of the drill programs.

But today’s reaction seems a bit overdone especially considering NHE is yet to sample the well and COULD still declare a discovery by early next week...

What we want (and hope) to see next:

For us NHE’s Mbelele-1 well was always about declaring a basin opening discovery.

By that, we mean NHE would drill and confirm everything the 2D/3D seismic data and geochemical samples were showing in the lead up to drilling.

By drilling right up against the basin margin fault closure we wanted to see NHE:

• Identify gross/net pay zones in the well - this would tell us how big the reservoir structures targeted with NHE’s first well could be.
• Sample the reservoirs and confirm helium grades - this would tell us NHE’s theory is in fact, correct and there is helium in the reservoirs.
• Declare a discovery - prove there is a working hydrocarbon system and that there are high grades of helium in the system.

From our reading of the announcement clarification this afternoon, all this is potentially still to come... “in a number of days”.

Then with Mbelele-2, we wanted to see NHE go out and show that the structure extends out into the basin.

By drilling out into the basin, NHE would start to test whether the reservoirs found in Mbelele-1 extend out toward the centre of the basin.

If similar/better results are found with Mbelele-2, then it should be enough for NHE to take its 15.7BCF Mbelele prospective resource into the contingent/reserve category.

That is usually the final step before a company can start planning appraisal wells (designed for flow tests) and to start modelling the economics of a reservoir.

NHE confirmed in today’s announcement that its rig would start moving to the Mbelele-2 site after the sampling program was done at Mbelele-1.

Again another positive sign NHE are still moving ahead with the two-well program - something that they wouldn't be doing if the first well was a failure.

At the time of writing this NHE’s share price had come off 30% in the morning but clawed back most of those losses by the afternoon to be down only 10%.

There is still a chance that In a few days' time, NHE does declare a discovery, and we will see the usual gross/net pay numbers we are so used to seeing from oil & gas wells.

Why we are Invested in NHE:

A key reason we are Invested in NHE is because of the re-rates we have seen for oil and gas explorers that make discoveries across the East African Rift System.

There is:

• Africa Oil which made a basin opening discovery in Kenya and saw its market cap re-rate into the billions of $.
  AND
• Hardman Resources which made a discovery in Uganda back in January 2006 and was taken over by Tullow for ~$1.5BN only 8 months later.

We are Invested in NHE to see it do something similar, but this time looking for a different type of gas - helium.

Our NHE Big Bet is as follows:

“NHE discovers the world’s largest helium reserve held by a single company and is strategically acquired by a major company OR a state owned enterprise to secure supply (USA, China, Qatar)”

(NOTE: This 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 by the company to get to this outcome and obvious risks to which need to be considered, some of which we list in our NHE Investment memo).

Just last week we wrote the following note which does a deep dive on the whole NHE story, in that note we touched on:

• Quick summary on helium and what it is used for
• NHE’s two well helium drilling program - testing one targets out of 10
• Strings of Pearls - found in the East African Rift System
• String of Pearls History: Our first 10 bagger back in 2012- What a previous successful drill campaign looks like
• String of Pearls History: Success at Hardman Resources - 2c to over $2
• East African Rift Basin Land Grab - NHE snapped up all the best ground
• NHE: Getting the Hardman Resources band back together

Check out that note here: NHE about to drill the world’s largest prospective helium resource

What are the risks?

The key risk now for NHE is “Exploration Risk”.

There is always a chance NHE makes no discovery and in that scenario, we think NHE’s share price could re-rate lower significantly.

There is also “Funding Risk” given NHE is drilling two wells back to back.

NHE had $8.1M cash in the bank at the end of the September quarter but there is always a chance the company looks to raise additional capital during or immediately after the drill program to fund its second well.

As a result we think “funding risk” is also something to consider in the short term.

To see all of the risks for NHE read our NHE Investment Memo.

Our NHE Investment Memo

Click here for our NHE Investment Memo, where you can find a short, high level summary of our reasons for Investing.

In our NHE Investment Memo, you’ll find:

• Our NHE Big Bet
• Key objectives for NHE
• Why we are Invested in NHE
• What the key risks to our investment thesis are
• Our investment plan