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?
- 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.
- 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.
- 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.
- 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.
- 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.
- 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: MATERIALISED
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.
Investment Milestones for GLV
✅ Initial Investment: @2.5c
🔲 Top Slice
🔲 Free Carry
🔲 Take Profit
🔲 Price increases 300% from initial entry
🔲 Price increases 500% from initial entry
🔲 Price increases 1000% from initial entry
🔲 12 Month Capital Gain Discount
🔲 Hold remaining Position for next 2+ years
Investment Milestones for PRM
✅ Initial Investment: @1.2c
🔲 Top Slice
🔲 Free Carry
🔲 Take Profit
🔲 Price increases 300% from initial entry
🔲 Price increases 500% from initial entry
🔲 Price increases 1000% from initial entry
🔲 12 Month Capital Gain Discount
🔲 Hold remaining Position for next 2+ years
