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PRM and GLV Limited

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What does this company do?

This investment is in the near term drilling of a large offshore gas prospect in the North West Shelf in WA.

This region is home to some of Australia's biggest ever gas discoveries and ~47mtpa of liquefied natural gas (LNG) processing infrastructure.

The Sasanof Prospect has a 7.2 Tcf gas and 176 million barrels of condensate 2U (Unrisked mid-case) prospective resource, meaning it is one of the biggest oil and gas wells drilled in Australia by an ASX junior explorer in recent decades.

Drilling of the Sasanof-1 well is scheduled to commence in May 2022 (a few weeks away) with the result expected soon after in June.

NOTE: This investment is high risk and the result of drilling will be binary, and will be known in the next two months. Depending on the result we expect the share price could rise OR FALL significantly.

What is the macro theme?

Gas is a very hot topic at the moment. The Russia/Ukraine conflict has exposed the European Union’s reliance on Russian gas imports as its primary source of energy supply, sending gas prices soaring globally.

As a result, energy independence has become priority number one globally.

We expect that this will put pressure on gas prices to rise in the medium-long term.

Why did we invest?

  1. Near term major catalyst - Drilling is scheduled to commence in May 2022. The Sasanof-1 well is fully funded, fully permitted and all of the rig contracting is already in place. This means it won't be long before we find out whether our investment has been successful…or not. This investment is high risk and will deliver a binary outcome in the next 6 to 12 weeks - note our specific investment strategy for this drilling event at the end of this memo.
  2. Roll of the dice - we don’t usually invest in high impact drilling campaigns like this so close to a binary drilling event, but we really liked the prospect and have invested on the chance it could be a success. This investment is high risk and accordingly the position makes up less than 2% of our total small cap Portfolios across Associated Entities.
  3. Significant prospective resource: The Sasanof-1 well is targeting a 2U (unrisked mid case) prospective resource of ~7.2 trillion cubic feet of gas and 176 million barrels of condensate making it regionally significant. For context, the Bass Strait (the main supplier of Australian domestic gas for decades) at its peak had 10 trillion cubic feet of gas reserves.
  4. High success rate at nearby Equus project: The Sasanof well is an exploration prospect that sits around JV partner Western Gas’ Equus Project, which has a discovered resource of 2 Tcf and 42 million barrels of condensate. That project has had US$1.8 billion invested in it since 2007 and a historic exploration drilling success rate of 88%, with 15 discoveries from 17 wells.
  5. Low cost well on a risk reward basis: Targeting a tier 1 scale project with a deep water well at a cost of only US$20-25M. Offshore drilling can be extremely expensive — some drilling programs cost upwards of US$75M.
  6. Takeover target if a discovery is made: Majors in the area like Woodside/BHP, Exxon and Chevron are already investing heavily in their North West Shelf projects. Given the scale of the Sasanof prospect, a new discovery could lead to a takeover by major players already in the region, or alternatively it could be the “entry asset” for a major who is looking for a flagship project to get exposure to Australian gas.

In 2018, Japanese conglomerate Mitsui acquired AWE for $602M. AWE had a ~380 billion cubic feet (Bcf) proved resource, this transaction is a signal of the appetite internationally for Australian gas projects.

What do we expect the company to deliver in 2022?

Objective #1: Drilling of the Sasanof-1 well in May 2022

  • This is our primary reason for investing in the Sasanof prospect and we expect the result in the next 6 to 12 weeks.
  • All of the necessary drill permitting and regulatory approvals are already in place. The JV has already awarded drilling contracts and is now moving towards mobilising the drill rig ahead of the May drilling program.

Milestones:

We want to see the following take place in the lead up to and during the drilling program:

🔲 Drill rig mobilisation at the well site.

🔲 Drilling commencement.

🔲 Drilling results

At this stage we will be solely focused on the size of the gas column that is intersected with the following three scenarios which we will use to measure how much of a success/failure the drilling program was.

🔲 Forward plan to be put together based on the drilling results.

🔲 Prospective resource converted into a resource/reserve.

What are the risks?

🔲 Exploration risk:

The Sasanof prospect currently has a prospective resource which means there is no proven oil and gas presence as yet. The JV will be drilling the target to prove there is a working oil and gas system at the project.

There is always a risk that the drilling program fails to find anything and the well is plugged and abandoned without a discovery being made.

In the event that no discovery is made, there is a risk that the share price of both of these companies could depreciate significantly and any investment made in these companies could trade at cents for every dollar invested.

✅ Permitting risk (mitigated): All of the permitting for the Sasanof-1 well is already in place.

✅ Funding risk (mitigated): PRM has already raised all of the capital required to fund its share of the well with the cash already having been paid into the joint venture (JV) account.

✅ Technical risk (mitigated): The Sasanof-1 well is to be drilled on trend and updip from the confirmed Mentorc discovery which was identified by its strong amplitude anomalies in 3D seismic data. The Sasanof prospect has also been identified using 3D seismic data, displaying similar seismic amplitude anomalies. Mentorc was drilled three times and has a 2C resource of 378 billion cubic feet + 16.4 million barrels of condensate.

✅ Environmental risk (mitigated): PRM holds an interest in the joint venture that solely holds the Sasanof prospect. This means that the only responsibilities that PRM has as part of the JV are at the Sasanof prospect level. Any other abandonment liabilities that may be levied on JV partner Western Gas for its other projects are not the responsibility of PRM.

What is our Investment plan? - IMPORTANT

With oil & gas exploration, our usual strategy is to Invest long before the key drilling event and hold while the company de-risks the project (permitting, funding, geological analysis, target selection).

As the company de-risks the project in the lead up to drilling, the share price will typically rise. This is where we look to de-risk our position to be Free Carried into the drilling and drill results.

Our Investment in GLV & PRM is different — the majority of the pre-drill de-risking is already complete, and all that remains is to drill the well in a few weeks time, so this Investment is essentially a “bet” that the well will come in.

This particular Investment is heavily weighted to the actual success of the drilling event, which is a much higher risk than our usual strategy for Investing in oil & gas exploration.

Our Investments GLV & PRM will be farming in a combined 37.5% interest in the prospect based on the following terms:

We took positions in both companies because in early April they had a similar market cap to % project interest ratio. We consider that holding both is a hedge against which company has more tightly held shares and might rise more on a successful result.

If the share price runs up in the lead up to drilling in the coming weeks we will look to Top Slice and hopefully Free Carry. 

NOTE: This Investment is unusually close to a binary drilling event compared to our usual strategy, so we have sought and received a once off approval to adjust our usual 90 day trading blackout after a new portfolio addition to be allowed to sell up to 30% of our positions in PRM and GLV after 20 days (prior to the drill result).

But given the short time to spudding we suspect we will be holding a significantly larger than usual position heading into the drill result. We hope drilling will be successful, but are fully prepared for it to fail.

This Investment is high risk and accordingly the position makes up less than 2% of our total small cap Portfolios across Associated Entities. 

This Investment suits our risk profile, but it may not suit yours.


Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 7,000,000 GLV shares, 49,000,000 PRM shares and 11,833,332 PRM options at the time of publishing this memo. The Company has been engaged by PRM and GLV to share our commentary on the progress of our investment in PRM and GLV over time.




LNG markets to benefit from Russian gas supply tightening

PRM and GLV Apr 28, 2022

This week Russia declared that it would be cutting off gas supplies to Poland and Bulgaria as of Wednesday.

Off the back of this announcement, European gas futures traded ~17% higher as both Poland and Bulgaria are forced to look for alternate supply routes.

This is where the European problem starts to become an international one, as the Europeans look to secure supply through the international LNG markets.

All of a sudden there is an influx of demand into an already tight market, where the Asian countries are already buying up whatever spare capacity of LNG there is on the market.

This quote from Credit Suisse energy analyst Saul Kavonic really highlights this point, “If Russian gas flows into Europe are shut, LNG prices could rise to over $US100/MMBTU as Europe scrambles to suck more gas away from Asia to make up for part of their shortfall”.

As gas supplies increase in terms of strategic importance, the latest investments in our Catalyst Hunter portfolio, Prominence Energy (ASX: PRM) and Global Oil and Gas (ASX: GLV) are preparing to drill one of 2022’s highest impact oil and gas wells.

PRM and GLV have a combined 37.5% interest in the Sasanof Prospect located in the North West Shelf, offshore WA. The North West Shelf is home to ~47mtpa of LNG processing capacity and a supply source for global LNG markets.

The Sasanof Prospect has a prospective resource of 7.2 trillion cubic feet and 176 million barrels of condensate on a 2U basis (unrisked mid case).

PRM and GLV have timed the drilling program to perfection and in the event that a discovery is made, a project with the size and scale of the Sasanof prospect could become of interest to both domestic and international players looking to secure gas supplies.

In our last note we touched on the takeover of AWE in 2018, which made one of Australia’s largest ever onshore discoveries. An indication that when a large gas discovery is made in Australia, it almost certainly pops up on the radar of major players in the oil and gas industry.

To see the key reasons we invested in PRM and GLV, what we want to see from the upcoming drilling program, the risks to our investment thesis and our investment plan check out our launch note here.

Read More: Introducing Our new Catalyst Hunter Portfolio additions PRM and GLV


Natural gas prices in the US at highest levels since 2008

PRM and GLV Apr 19, 2022

The impacts of the Russia/Ukraine conflict on oil & gas supply chains seem to be getting worse by the day - natural gas futures in the US trading as high as ~US$8.05/MMBtu overnight - the highest level seen since 2008.

The following article published by CNBC titled “Natural gas surges to highest level since 2008 as Russia’s war upends energy markets” highlighted the fact that US natural gas prices are now up ~108% for the year.

More importantly though, the article made mention of the U.S now exporting record amounts of liquefied natural gas (LNG) to Europe.

The key takeaway for us was that there is now a battle developing between Asia and Europe for spare LNG cargoes - the two continents are locked into a bidding war for whatever spare capacity is available in the market.

With China being a net energy importer and Europe now trying to diversify away from Russian gas (which accounts for ~40% of natural gas usage inside the EU), we suspect that this will create upwards pressure on gas prices globally.

All of this means that demand for new gas supplies globally has never been higher.

Just last week we announced the two latest additions to our Catalyst Hunter portfolio, which are only a few weeks away from drilling one one of the largest oil & gas wells being drilled by an ASX junior in decades.

Our investments Prominence Energy (ASX: PRM) and Global Oil and Gas (ASX: GLV) have a combined 37.5% interest in the Sasanof Prospect located in the North West Shelf, offshore WA. The North West Shelf is home to ~47mtpa of LNG processing capacity and a supply source for global LNG markets.

The Sasanof Prospect has a prospective resource of 7.2 trillion cubic feet and 176 million barrels of condensate on a 2U basis (unrisked mid case). The prospect therefor has the potential to host a resource larger than, or at least rival, the size of discoveries made by oil and gas majors like Exxon, Chevron and Woodside in this part of WA.

To see the key reasons we invested in PRM and GLV, what we want to see from the upcoming drilling program, the risks to our investment thesis and our investment plan check out our launch note here.

Read More: Introducing Our new Catalyst Hunter Portfolio additions PRM and GLV