WH Ireland has been caught on the hop by yesterday's positive operational update from UK Oil & Gas Investments PLC (LON:UKOG).
The broker has its target price under review after being surprised by the increased column of fractured Kimmeridge formation announced in yesterday's stock market statement, released late in the afternoon.
The company said it has completed perforating and well completion operations at the Broadford Bridge-1z well and that it is rigging-up well production testing equipment, while all permissions are in place to test the well.
Operational milestone
The completion of the first UKOG-operated well represents an important operational milestone given that it was safely and efficiently drilled while successfully extrapolating extensive cores, wireline and pressure data, WH Ireland said.
“The company indicated that an aggregate total of 1,064 feet of naturally fractured Kimmeridge zones have been perforated, inclusive of limestones and shales, which the company believes may both be effective reservoirs based on comprehensive analysis inclusive of direct core analysis and the observation of movable oil. Pressure dynamics upon perforating indicate the movement of fluid into the well at each zone, as well as oil seen at surface,” the broker said.
READ: UKOG completes acquisition of additional Horse Hill stake
“As a reminder, the Horse Hill-1 (“HH-1”) well was production tested at an aggregate rate of 1,688 b/d of which 1,365 b/d was from the Kimmeridge Limestone (“KL”) KL4 and KL3 horizons, with the remainder from a conventional discovery that is a separate play to the Kimmeridge formation. The cited production rates for the two Kimmeridge horizons were from perforated intervals aggregating 168 feet (vertical). Stabilised flow was achieved over a period of 4.0 hours and 7.5 hours for KL4 and KL3 respectively,” the broker added.
More data needed
WH Ireland is now awaiting more data to give it more to go on before setting a new target price, but it has tried out a few scenarios.
For perspective, based on the extrapolation of a production profile from the initial production rates tested at the HH-1 from two horizons and applying a US$55-a-barrel-flat Brent commodity price assumption, WH Ireland estimates each well would have an after-tax net present value (applying a 10% discount rate) of US$8.9m.
This valuation assumes the well produces a total of 1.0mm barrels of oil, that it comes on-stream at 1,250 barrels a day (b/d) and that the well’s production rate declines to 335 b/d at the end of the first year before stabilising.
“Admittedly, in the absence of production history the level of uncertainty in relation to the declines is heightened, which is why the forthcoming test is of paramount interest. We are now looking at a situation where the scale of the column is significantly greater than we had foreseen; however, extrapolating the implication of more fractured reservoir to a precise production rate and decline curve is speculative and we are hesitant to provide estimates in this context,” the broker said.
UKOG's shares rose from 7.58p yesterday to close at 8.97p, but were down 2.3% at 8.77p in late morning trading on Thursday.